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Buybacks: The New Magic Beans

Synopsis: Stock buybacks increase corporate leverage. Investors err if they apply the old P/E ratio to the new, now higher EPS, which is solely due to the reduction of outstanding shares. Because leverage has increased, the P/E ratio should fall, as the company is now riskier. Theoretically, via the academic discipline of corporate finance, and used by most Wall Street analysts, management should prioritize its use of cash as follows: …Read More