What does it mean that airlines shouldn’t be allowed to buy back stocks?
In:
Let’s imagine that 5 siblings own a rental property that is worth $500,000 and produces rent of $2,000 per month.
To make the accounting simple, we’ll say that the siblings incorporated and each got 10,000 shares in the house. So there are 50,000 shares each worth about $10.
Let’s say that you have a policy of sending $1,000 of the rent out to the owners every month (you’re using the other $1,000 to save to replace a roof that’s only got a few years left). So every month each share gets $0.02 or each owner gets $200.
Now lets say that after a year of saving there’s $12,000 in the roof fund, but 3 siblings vote to spend the some of the roof savings buying shares back from any sibling that wants to sell. So they take $10,000 out of the roof fund and buy 1,000 shares of the house.
Now there are only 49,000 shares so each share gets a little more each month from the same $1,000 payment, and at the end of that year they spend another $10,200 of the roof fund buying back another 1,000 shares.
The next year, the payment per share grows a little more. If this continues for 4-5 years, the payment keeps growing slowly every year (making each remaining share more valuable even if the house doesn’t rise in value). This also means the value of their shares rises dramatically, if the house appreciates.
Unfortunately, when the roof finally fails, the owners suddenly need to spend $50,000 and there may only be $10,000 in the roof savings and their father is angry that they spent the savings they were supposed to be saving to replace the roof increasing the value of their shares.
So when they ask their dad for money to replace the roof, he’ll probably pay for the roof to be replaced, to prevent the house from being destroyed, but he may use his leverage gained by saving the house to change how they operate the business (forcing them to save money for known future problems).
Latest Answers