Why is it bad for investors when a company buys back its own stock at a price HIGHER than its intrinsic value?
In: Other
There is no such thing as intrinsic value.
Buybacks may, in general, possibly a bad signal for *long-term* investors.
When a company has available cash, it has several options on what to do with it. Part of it generally goes to ensuring liquidity, but let’s set that aside and talk about “extra” cash beyond what you need for ongoing business. There are mostly two things that a company can do with it: reinvest or pay out.
Reinvestment might mean expanding its operations, hiring more people, building new offices, getting new equipment, or a wide variety of other things depending on the industry. Paying out may come in the form of dividends, buybacks, or other mechanisms.
Companies are generally expected to go through various phases of growth and distribution – similar to how you would not expect fruit from a tree early in its growth. If a company starts switching from reinvestment to payouts, that means you should not expect as much growth from it. If you were investing with the hope that the company would grow, that’s bad – but if you want the payout now, then that’s good.
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