Equities Valuation: The Impact of Including Share Buybacks in the Dividend Discount Model
There are both advantages and disadvantages to including share buybacks cash flows in the valuation. One advantage is that it provides a more accurate representation of how the company is returning cash to its shareholders. Since share buybacks are another means by which companies return cash to shareholders, it makes sense to include them in the valuation. Another advantage is that including share buybacks can provide a more accurate picture of the company’s financial health. If a company consistently buys back shares, it may indicate confidence in its future earnings.
On the other hand, one disadvantage of including share buybacks cash flows in the valuation is that it can make the valuation more complex. Since share buybacks are not as straightforward as dividends, accurately factoring them into the valuation can be more challenging. Additionally, share buybacks can be less predictable than dividends, making it more difficult to accurately forecast future cash flows.
