Jr,
"""The company takes $10 and buys back 4 shares at 2.50 each.
The company now has $40 in cash, $40 in book value and 6 shares outstanding. The book value per share is now $6.66 each"""
When the company buys back those 4 shares, those 4 shares are usually cancelled or become resident in AGNC's Treasury and therefore are not counted as "outstanding". So, you see, the idea of the company owning the shares and the shares becoming an "asset" is wrong. Most times they(the bought back shares) are cancelled, destroyed, kaput, vaporized or whatever expletive you choose, but you get the idea.
BV, therefore goes down. Here is a blurb re. PM from a recent article:
"""We know the basic equation for the balance sheet.
asset=liability+equity
Now, let us see what happens when a company buys back shares. Let us suppose that the company bought back $100 million worth of shares. This money goes out of the assets of the company. How do we account for this on the right side of the equation ? Well, this money goes out of the equity. And we get lower equity and lower book value. Not surprisingly if we look at the book value per share of PM we have the following data
Year 2010 / 2009/ 2008
Book value per share 2.18/ 3.26/ 3.94
So, here are the lessons to learn:
Share buyback reduces the book value per share and reduces equity hence increasing the debt-to-equity ratio. For companies doing share repurchases the decrease in book value per share is not a warning sign, the same goes for large debt-to-equity ratio. One needs to be careful when rejecting such companies using a screener or a black box method of not choosing companies with large debt-to-equity ratio and decreasing book value per share."""
Make sense?
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