We’re often asked about the wisdom of a company using its capital to purchase shares of its own stock, rather than using it for things such as paying a dividend or investing in equipment, plant, property or people. When the company reduces its number of shares outstanding, each remaining share of stock represents a larger percentage ownership in the company. That is, a company with zero growth in earnings can increase its earnings per share by retiring shares. Or, even more attractively, a company with increasing earnings can grow EPS at a faster rate by reducing share count.
Mohnish Pabrai is one of the smart folks in our industry. His research finds a very high historical correlation between stock returns and a company’s propensity to buy its own shares.