The Mathematics of Buybacks
Why every investor cries for it but not many really understand it
With that provocative tagline, I begin our exploration into understanding buybacks & why Buffett keeps harping on it. Buybacks have gone from a tool for capital allocation to a metric that management wants to do, because that will prop up the share price (The irony is that higher share price will lead to poorer capital returns via buybacks). When you ask an investor the question - Why buybacks?, the most frequent answer is ‘It is tax free compounding’.
It is correct but it is not the entire picture. There is more to buybacks than that meets the eye. We will explore that with a case study on AMR 0.00%↑ Alpha Metallurgical Resources. AMR is a metallurgical coal miner in USA.