Why is it bad for investors when a company buys back its own stock at a price HIGHER than its intrinsic value?
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Let’s say you have a company with 10 shares, and each share is $9 each. Your company is worth $90. They earn $10. Now the company is a $90 with $10 in the bank, so the company is worth $100. Each share is worth $10… which is the $9 intrinsic value plus each share owns $1 from that $10.
The company decides to buy back a share at $10. Now we’re down to 9 shares, but the company no longer has $10 in the bank. So now the company is only worth $90, but it’s split 9 ways, so each share is worth $10. Repurchasing shares didn’t actually change the value of each share.
Now let’s say on Monday the shares are $10, on Tuesday they’re $20, and on Wednesday they’re $10 again. And unfortunately the company bought back the shares on Tuesday. So they only bought half a share. So your company spent $10 on half a share. Now there are 9.5 shares (10 original shares minus 1/2) of a $90 company. Split $90 9.5 ways and now your $10 share is worth $9.47. Not the $10 it should be.
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