Stock Repurchases
Sample Solution
In the article "Royal Dutch Shell Finally Delivers Big Stock Buyback, but Shares Break Support" by Aparna Narayanan, the author discusses the impact of stock buybacks on key financial ratios. Narayanan argues that stock buybacks can have a positive impact on earnings per share (EPS), return on equity (ROE), and price-to-earnings ratio (P/E ratio). However, she also notes that stock buybacks can have a negative impact on book value per share and cash flow per share.Full Answer Section
Importance of Stable Dividend Policies
Stable dividend policies are important for a number of reasons. First, they can help to attract and retain investors. Investors are often drawn to companies that have a history of paying reliable dividends. Second, stable dividend policies can help to reduce the volatility of a company's stock price. Investors are more likely to hold shares in companies that pay regular dividends, even when the stock market is volatile. Third, stable dividend policies can help to signal to investors that a company is well-managed and financially sound. Companies that are able to maintain a stable dividend policy are often seen as being more reliable and trustworthy than companies that do not.
Reasons Behind Stock Repurchases
Companies may repurchase their shares for a number of reasons. Some of the most common reasons include:
- To increase EPS: When a company repurchases its shares, the number of shares outstanding decreases. This can lead to an increase in EPS, as EPS is calculated by dividing net income by the number of shares outstanding.
- To improve ROE: ROE is calculated by dividing net income by shareholders' equity. Shareholders' equity is reduced when a company repurchases its shares. This can lead to an improvement in ROE, as ROE is calculated by dividing net income by shareholders' equity.
- To reduce the P/E ratio: The P/E ratio is calculated by dividing the stock price by EPS. When a company repurchases its shares, EPS increases and the stock price may decrease. This can lead to a reduction in the P/E ratio.
- To signal to investors: Stock buybacks can be seen as a signal to investors that a company is confident in its future prospects. When a company repurchases its shares, it is essentially saying that it believes that its shares are undervalued.
How Stock Repurchases Affect Individual Financial Metrics and Returns
Stock buybacks can have a positive impact on a number of financial metrics, including EPS, ROE, and the P/E ratio. However, stock buybacks can also have a negative impact on other financial metrics, such as book value per share and cash flow per share.
EPS
EPS is calculated by dividing net income by the number of shares outstanding. When a company repurchases its shares, the number of shares outstanding decreases. This can lead to an increase in EPS.
ROE
ROE is calculated by dividing net income by shareholders' equity. Shareholders' equity is reduced when a company repurchases its shares. This can lead to an improvement in ROE, as ROE is calculated by dividing net income by shareholders' equity.
P/E ratio
The P/E ratio is calculated by dividing the stock price by EPS. When a company repurchases its shares, EPS increases and the stock price may decrease. This can lead to a reduction in the P/E ratio.
Book value per share
Book value per share is calculated by dividing shareholders' equity by the number of shares outstanding. When a company repurchases its shares, shareholders' equity decreases. This can lead to a decrease in book value per share.
Cash flow per share
Cash flow per share is calculated by dividing cash flow from operations by the number of shares outstanding. When a company repurchases its shares, the number of shares outstanding decreases. This can lead to an increase in cash flow per share.
Returns
Stock buybacks can have a positive impact on returns, but the impact can be difficult to quantify. Some studies have shown that companies that repurchase their shares tend to outperform the market over the long term. However, other studies have shown that there is no correlation between stock buybacks and returns.
Supply Chain Management
Days of Working Capital (DWC)
DWC is a measure of how long it takes a company to convert its working capital into cash. It is calculated by dividing working capital by cost of goods sold (COGS).
Calculation of DWC
The following formula can be used to calculate DWC:
DWC = (Working capital / COGS) * 365
Working capital is calculated by subtracting current liabilities from current assets. Current assets include cash, accounts receivable, and inventory. Current liabilities include accounts payable, accrued expenses, and short-term debt.