Share-Splitting Math

Q Does it benefit shareholders when companies buy back shares? — G.L., online A It certainly can, as the reduction in the share count leaves each remaining share with a bigger stake in the company. (Imagine a pizza being cut into seven instead of eight pieces — each piece will be bigger.) But the company should buy back shares only when they’re undervalued. If it buys back overvalued shares, it gets fewer shares for its money and destroys shareholder value. That money might have been better spent paying dividends or in some other way. Here’s how buybacks work, in a simplified example: Imagine that Acme Explosives’ (ticker: KBOOM) earnings have stalled at $10 million annually, and it has 10 million shares outstanding. Its earnings per share (EPS) are thus $1. If Acme buys back a tenth of its shares, leaving 9 million, then its EPS suddenly rises to $1.11 ($10 million divided by 9 million). When studying a company’s financials, it’s preferable to see earnings growing mostly due to business growth, not share buybacks. You can examine a company’s income statement for signs of buybacks — or look up news reports on them. Apple, for example, had 6.5 billion shares outstanding back in 2013, and its recent share count was 4.9 billion. That reflects share buybacks. Q If I buy shares of a stock after its “date of record” for a stock split, but before the actual split, will I get the additional shares? — R.B., Dothan, Alabama A Yes. As long as you’re holding the stock on the date of the split, your shares will be split — increasing in number and decreasing in share price proportionately. The record date is mainly for accounting purposes. Want more information about stocks? Send us an email to foolnews@fool.com.