Capital Market Chronicles – Episode 150: STOCK BUYBACK (Part II)

 Capital Market Chronicles – Episode 150: STOCK BUYBACK (Part II)

Welcome back, dear readers! Last time, in Part I, we peeked into the world of stock buybacks and discovered how companies use them to look like financial superheroes. But in Part II, we’ll put on our detective hats 🕵️‍♀️ and figure out whether these heroes are genuine Avengers… or just corporate magicians pulling rabbits out of balance sheets

The Cookie Jar Trick 🍪

Imagine a cookie jar with ten cookies. You eat two. Suddenly, the remaining eight cookies look bigger. Have they really grown? Nope. You’re just hungrier. That’s exactly what stock buybacks do with shares: fewer slices, bigger-looking earnings per slice.

Why Companies Do Buybacks (The “Official” Reasons):

1. Boost EPS: With fewer shares, Earnings Per Share magically increase. Investors love higher EPS — it’s like free frosting on a stale cake. 🎂

2. Management Confidence: Executives strut around saying, “See, we believe in ourselves!” But hey, even magicians believe in their own tricks. 🎩✨

3. Returning Cash to Shareholders: Instead of giving you a regular allowance (dividends), the company decides to buy back stock. It’s like your parents saying, “We won’t give you pocket money every week, but here’s a one-time shopping spree.” 🛍️

4. Handling Stock Options: Buybacks help cover the dilution from employee stock options. Think of it as the company quietly fixing the mess it made by printing extra shares earlier.

The Dark Side 🌑

But hold on! Not all that glitters is shareholder gold. Sometimes buybacks are:

• Financial Gym Selfies: Companies flex EPS and ROE like biceps, even though the actual business hasn’t gotten stronger. 💪📸

• Debt-Fueled Fireworks: Borrowing money to buy shares? That’s like taking a loan to throw a lavish party. Fun for one night, headache for years. 🥳➡️💸

• Short-Term Fixation: If a company spends more time shrinking shares than expanding its business, it might be telling you, “We don’t know where else to grow.” 🚫🌱

A Quick Detective Case: ABC Company 🔍

• Before Buyback:

  • EPS = Rs. 35

  • ROE = 8.75%

  • Book Value per Share = Rs. 400

• After Buyback:

  • EPS = Rs. 46.66 (Wow, magic! 🎩✨)

  • ROE = 27.99% (Looks buff 💪)

  • Book Value per Share = Rs. 166.66 (Oops, kind of shrunk 📉)

It looks amazing — until you realise nothing about the actual business changed. Same profits, same operations, just fewer cookies in the jar.

The Takeaway 🎬

Stock buybacks can be powerful tools when used wisely — like a chef carefully reducing sauce to make it richer. But when overdone, they’re more like Instagram filters: flattering, but not the whole truth.

So next time you see a company announce a buyback, don’t just clap at the fireworks. Ask:

• Is it confidence or cover-up?

• Is it sustainable or a short-term sugar rush?

• And most importantly, are you being served cake… or just the crumbs? 🍰➡️🍪

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