[DesertCat]

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I'm saying lots of times the companies will buy back overvalued stock, and in a lot of cases the buybacks just serve to keep the share count constant when you consider the amount of options being granted. Buybacks make sense only if the stock is clearly undervalued, seems like a lot of managements spend a lot of money on buybacks without being clear on that point.

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I'm still not following. If the same amount of money goes back to shareholders don't you just want to do it in the most tax efficient way?

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The cash used in stock buybacks don't go back to "the" shareholders, it goes back to the specific shareholders who sell shares. It's only good for the remaining shareholders if the shares are bought at a discount to intrinsic value.

For example. Assume you have a company with no business, $1M in cash, no liabilities, and 100,000 shares of stock, for a net value of $10 per share in cash.

Assume company is able to buy back 50,000 shares of stock at $5. Now the company has $750k in cash, and 50k shares, for a net value of $15 per share. The remaining shareholders benefited because the buyback increased intrinsic value of the remaining shares.

The counter example is if the stock was trading at $20 per share. The company is able to buy back 40k shares at $20 per share. Now the company only has $200k left in the bank, and 60k shares. Net value per share has shrunk to $3.33 per share. Remaining shareholders got hosed. An $800k dividend would have been a much better solution, since the company could have paid out $8 per share to every shareholder, and still be worth $2 per share afterwards.

These examples are simplistic, but every company has a rough value based on the value of it's future earnings stream and current assets. CEO's unfortunately can be motivated to undertake stock buybacks regardless of whether the economics are favorable or not for shareholders. This is because most CEOs have lots of stock options, and their biggest concern is increasing the stock price when those options vest, and minimizing shareholder concern over issuing too many stock options.

Undertaking stock buybacks props up the stock price (in the short run) even if it hurts the stock's value (and price in the long run). And buybacks also are a method to hide excessive management stock option grants. With one hand they give options away, with the other they buy shares to keep the total share count from rising too quickly.