Mandatorily Redeemable Shares

Finance allah shmoop what is a share buyback Investors put

a price on stocks every day every minute every second

they're willing to pay a certain price for that little

slice of pie of ownership in a company in that

price is re calculated all during the trading day Well

generally speaking over time those prices are there or at

least fair enough that is they're close enough to the

value that the company places on itself that the company

doesn't directly actively try to do anything about its share

price Structurally companies are of course always trying to you

know market themselves toe wall street but it's a rare

thing when companies actively hold up three fingers and tell

wall street Teo you know read between the lines when

companies flip the street the bird they're basically saying you

guys are idiots you don't get us our stock is

worth way more than what you're paying for it so

then cos basically put their money where their mouths or

ah you know fingers are sometimes both so then the

company begins the process of buying itself back from whatever

pieces are controlled are owned by wall street and or

the public that is The company goes into the open

market and starts buying back its stock one share at

a time Mcgee dot com makes gummy shaped candies in

weird semi erotic shapes A recent dental rating came out

which stated that shmoop gigi's were terrible for your teeth

and people should not eat them It came from that

darn fifth dentist who never recommends colgate toothpaste All right

well under this news fourteen of the six thousand stores

who sell shmoop gigi's pull the shmoop gigi's from their

shelves costing the company may be a penny a share

in earnings that quarter Like no big deal Instead of

earning a dollar and a penny this year well they'll

only earn a dollar big love big crisis in the

press though for like thirty seconds and then really no

big deal financially iii nobody cares That's mcgee's air bad

for you They are the chewy version of cigarettes and

kim kardashian right Well the stock however goes from trading

at twenty five dollars a share to just eight dollars

a share under a daily day luge of negative blog's

from school mothers who swear they'll never buy shmoop gigi's

again And what were they buying Semi erotic shape things

for their children anyway Like who are these mothers And

were they Really for the children All right well we

won't get into it The company has no debt and

it has four bucks a share in cash and no

big cap pecs needed like a new shmoop gigi smelting

machine factory on the horizon Will the company doesn't need

all the four dollars a share that they have and

think about that that's four dollars a share on an

eight dollars stock price Like a cat the stock prices

just cash It generates about a dollar a year in

cash cash flow So at the very least it decides

to immediately by back twenty percent of its shares outstanding

Happy to put toe work a few dollars a share

of cash on its books if you think about that

eight bucks a share Four bucks in cash and earns

a dollar means that the equity cap trading it four

times cash earnings like super cheap All right Well with

one hundred million shares outstanding they had four hundred million

dollars in cash and a market valuation of eight hundred

million bucks Will the company files a special form called

the ten b fiveone form which outlines how they will

buy back Every share they can up to two hundred

million dollars worth of stock for eight bucks a share

or cheaper like stock goes down from eight dollars They'll

buy more If goes up above eight dollars They'll just

stop knucklehead mothers and angry dennis continued to negatively blawg

about human g and a stock stays cheap but exactly

eight bucks a share or less So the company is

able to buy back two hundred million dollars worth of

stock that's two hundred million dollars divided by eight bucks

a share or twenty five million shares they've just bought

back When finally the negative stories go away the sellers

of their stock have completely sold out and the stock

starts to go up again on lee Now things were

a bit different instead of the company having four bucks

a share in cash while the company now has two

bucks a share in cash right they took two dollars

a share or two hundred million dollars to buy back

twenty five million shares of their own stock So now

they have a bit less cash but the company is

still producing a dollar a year in cash earnings and

in two years it should have more than four dollars

a share in cash again just through normal cash production

way More importantly the company has shrunk it's capitalization from

a market valuation of eight hundred million dollars Remembered how

one hundred million shares It was eight dollars times one

hundred Yeah only now the company has bought back twenty

five million share so it went from having one hundred

million out too Just seventy five million Will the new

market value placed on the company at eight bucks Well

it's eight times seventy five million or six hundred million

dollars cheap So at the moment they stop buying back

stock they had two hundred million dollars in cash or

two bucks a share in cash An equity valuation was

four hundred million dollars That were doing all the math

here for you Very cheap for a company expecting to

have earnings of over one hundred million dollars next year

Right It's still trading it four times on this number

Note Also what has dramatically changed here in orderto earn

a dollar a share Before the share repurchase the company

had to have one hundred million bucks and earnings right

One hundred Million dollars divided by one hundred million shares

of stock equal one dollars sharing earnings but now the

company will still earn that hundred million dollars The naysayers

have all gone away but now the company has only

seventy five million shares outstanding So on the same hundred

million dollars in earnings they now earn one hundred divided

by seventy five equals a dollar thirty three a share

instead of just a dollar Note also that when the

company was a twenty five bucks a share before bushman

gigi thing hit the fan the equity value of the

company was twenty one times its earnings That is it

was the twenty five dollars a share minus the four

dollars in cash to get twenty one divided by the

dollar a share in earnings there That was twenty one

times the earnings of the company in equity value but

now the company's bought back a fourth of its shares

Were it to return to that twenty one times earnings

for the equity value Well that would be twenty one

times that dollar thirty three Two equal twenty eight dollars

a share It's a lot easier to earn better than

a dollar A share when they have only seventy five

million shares outstanding after this By back then it would've

been with a hundred million And this is the dream

scenario of share buybacks Cos time the bottom in their

own stock price And when their price gets quote stupidly

cheap unquote they file a bunch Papers Teo give crystal

clarity and disclose the details of the proposed by back

And if they're lucky there ends up being a rosy 00:06:26.034 --> [endTime] shmoop g at the end of the rainbow