Share-Split­ting Math

The Record (Troy, NY) - - BUSINESS -

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.

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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.

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