Michael Mauboussin on Market Concentration, Capital Allocation & Attributes of Great Investors | #545
The Meb Faber Show - Better Investing
Buybacks: A Double-Edged Sword
Buybacks do not automatically enhance earnings per share; they incur costs that may offset benefits. Companies must consider the trade-off between buyback expenses—typically financed through cash or borrowing—and the corresponding interest income or expenses. The elevated performance from buybacks has diminished, indicating less overall benefit for many firms. Determining appropriate price-to-earnings (PE) multiples relies on foundational valuation, anchored in the steady state multiple, which is influenced by the cost of equity capital. Historically, a balanced approach suggests that two-thirds of the valuation derives from steady state multiples while one-third corresponds to future value creation. Robust prospects for future value can support higher multiples, while poor future expectations elevate steady state multiples.
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