For a long time, we have complained that A-shares will only reduce their holdings for cashing out and financing, and they are slamming the door to death for repurchases.
This has led to the great growth of cattle in the United States in the past ten years, and we are envious of it.
But can this buyback model of driving up stock prices last?
And what is it that stimulates the large-scale buybacks of listed companies in the United States?
1. How arrogant is the buyback of listed companies in the United States?
Since 2008, U.S. listed companies have been very keen on buybacks.
As of the second quarter of 2023, the cumulative stock repurchase of U.S. non-financial companies since 2010 is close to US$6 trillion (40 trillion yuan), and the total market value of U.S. listed companies at the end of 2022 is about US$52 trillion.
The total circulating market value of A-shares is only more than 60 trillion yuan.
In the past ten years, the funds repurchased by others have been able to buy most of the A shares.
With such an arrogant father who continues to buy U.S. stocks, it's no wonder that it's hard to fall.
On the other hand, the repurchase amount of A-shares is only a stingy hundreds of billions of yuan (2010-present)
How much impact can a large number of buybacks have on the rise of stock prices?
Second, the impact of buybacks on the rise in stock prices
First of all, let's be clear that share buybacks do not affect the total market capitalization of the company.
Suppose that company A will repurchase 20% of the shares, and before the repurchase, company A has 20 billion outstanding shares, each worth 10 yuan, and the total market value is 200 billion yuan;
With the repurchase of 20% of the shares, there are still 16 billion shares in circulation after the repurchase, assuming that the total market value remains unchanged at 200 billion yuan, so the price per share will rise to 12.5 yuan, that is, the stock price has increased by 25% compared with before the repurchase.
In addition, buybacks can also improve ROE and EPS.
The reason is simple, because buybacks can reduce net assets per share and reduce share capital.
When these two indicators increase, valuations will also increase accordingly.
The trend of the S&P 500 EPS is highly consistent with the trend of the S&P 500 buyback size!
3. Apple's buyback case
Apple began to buy back a large proportion of its own shares in 2013.
In fiscal year 2021 and fiscal year 2022, Apple repurchased common shares for $86 billion and $89.4 billion, respectively, which is almost equal to the net profit of that year.
What's more interesting is that since 2013, Apple's profit growth center has been moving downward.
Judging from its current growth rate, it simply cannot support such a large share price rise.
Coincidentally, 2013 was also the year when Apple embarked on a buyback spree.
As a result, everyone understands what is supporting Apple's stock price.
Moreover, due to continuous repurchases, ROE has continued to improve and has risen to more than 170%.
This kind of A-share is completely unthinkable. You must know that Moutai is only 30%! This is the most bullish (B) company in A-shares.
Even if the year's performance declined, Apple's ROE was not affected much.
Fourth, the repurchase case of Starbucks
There is a strange phenomenon in the US stock market, that is, there are many companies with debt ratios greater than 100%.
This means that the company's net worth is negative.
According to our normal thinking, we may think that the company is about to go bankrupt and become insolvent.
However, in the U.S. stock market, such companies are alive and well, and they are all world-renowned large companies. This is the case with Starbucks, for example. See diagram below
Why is this happening?
Because the price of a stock in the secondary market is not reflected in the balance sheet, the book value and market value of the stock are not equal.
When a company buys back, it mainly refers to the market value of the stock, so the cost of repurchasing the stock is often at a premium to the book value.
Therefore, as long as the premium on the cost of repurchasing shares is too large, it may cause the retained earnings account to turn negative, and even cause the company's overall net assets to show a negative value. (This may happen even if the repurchase is not cancelled)
In addition, there is another important reason that the funds used by listed companies to repurchase shares are borrowed!
Why borrow it?
Because interest rates are so low, close to 0!
This kind of debt repurchase has been very common in the US stock market in the past decade or so!
Seeing this, you may wonder why these companies are so keen to buy back their own shares.
5. Benefits of repurchasing shares
As the so-called bustling world, all come for profit, and the world is bustling, all for profit.
Don't think of these companies as noble.
First, buybacks can boost earnings per share;
It is very difficult to directly increase the profit growth rate of the company as a whole.
However, through buybacks, it is easy to increase the profitability of U.S. stocks. After all, this is also one of the performance evaluation indicators that shareholders put forward to executives.
second, to achieve dividend tax avoidance;
In the U.S., cash dividends are taxed at a higher rate than capital gains tax, and stock buybacks can help shareholders avoid taxes.
third, to help companies avoid taxes;
Many companies repurchase liabilities, and the interest on the liabilities is to offset profits, which can reduce the company's tax expenses.
In the end, the value of the company is further enhanced.
In addition, an increase in debt ratio can also improve ROE.
Fourth, prevent executives from spending and investing indiscriminately
When a company has a lot of free cash flow on its books, executives may spend indiscriminately to satisfy their own interests, invest indiscriminately and expand indiscriminately, and harm shareholders.
If this cash is repurchased, it can protect shareholders very well.
Fifth, prevent hostile takeovers
If the equity is diluted, it is easy to be targeted and subject to hostile takeovers.
Sixth, U.S. listed companies can't find any investment targets
If there is more money and there is nowhere to spend it, it will be used to buy back.
6. Risk of share repurchase
Share buybacks are not all benefits either.
1. Decreased liquidity
When the stock size is repurchased, the number of shares circulating in the market decreases.
This leads to a lack of liquidity. See diagram below
Why is this happening?
The reason is very simple: there are so many listed companies in the US stock market, and most of them actually have no investment value, and institutions do not touch them very much.
And good companies have a lot of cash to buy back, and the number of shares in circulation is decreasing.
Then there are fewer and fewer stocks available for market trading.
It should be noted that when liquidity is insufficient, once there is a bit of an accident, the stock price usually plummets.
In the past decade or so, U.S. stocks have fallen sharply and slowly risen.
But will there be a day when there will be a mega-crash? (similar to 2000 and 2008)
Of course it's possible.
It's just that we can't predict which day.
2. The debt repurchase model cannot be sustained forever
The reason why U.S.-listed companies have so much cash for buybacks is because interest rates are too low.
They went around borrowing money to buy back shares.
As the saying goes, if you have a cheap advantage, you don't take advantage of it, and you can get 8 eggs.
There are many listed companies in the United States that have high debt ratios, and it is not uncommon for them to be higher than 100%.
With such high leverage, in case of a recession, cash flow disruption, interest rate hikes and other unpredictable black swans appear.
I'm afraid that the plunge will not be much better than A-shares.
In fact, the underlying logic behind maintaining a long bull through repurchase is the Federal Reserve's massive QE!
If we do this, A-shares can still grow bullish.
The stock market is originally driven by funds!
As long as you have money, are you afraid that it won't rise?
7. Why are A-share listed companies reluctant to repurchase?
After reading the above, I believe you have a deeper understanding of repo.
When it comes to why A-share listed companies don't repurchase, the answer is very simple:
1. There is no low-interest loan to borrow;
2. State-owned enterprises with abundant cash flow are the mainstay, but state-owned enterprises do not care about their stock prices, so they don't care if they don't buy back;
3. Small businesses are losing money, what to buy?
4. Small enterprises (especially technology companies) cannot borrow money from banks, and they come to A-shares for financing.
So, yes, it's a systemic problem, and we don't have the institutional and environmental soil to encourage buybacks.
In particular, our side is still relatively restrained in the monetary system.
Will QE also be killed in the future? It's not impossible. At least most countries are eventually forced to play like this!
But will there be a problem with borrowing like the US to buy back like it is?
We'll have to wait until later.
Personally, I think the most reasonable way is for listed companies to pay more dividends in a bull market and buy back more in a bear market.
The reward is voluntary, and 1 cent is silently supported, haha!