Einhorn: There Are 2 Types Of Buybacks

Einhorn: There Are 2 Types Of Buybacks

In an interview with CNBC, founder and president of Greenlight Capital David Einhorn specified the two types of buybacks and detailed which one was good, and which one was bad.

When a company has extra cash reserves and they want to return that money to shareholders, but they feel that their stock price is undervalued, repurchasing shares could create more value for loyal shareholders because it reduces the number of outstanding shares and allows shareholders to own more of the company without actually have to shell out more of their money. “I think those buybacks are great,” Einhorn told CNBC, and were likely the type of buybacks that Warren Buffett was defending when he called those who criticized buybacks “economic illiterates” in his annual letter to shareholders earlier this year.

However, a second type of buyback happens when a company’s stock is trading an extremely high value, and the company chooses to pay their employees in stock. Rather than counting the earnings, the company attempts to reduce the dilution by using their cash reserves to buy the overvalued stock. Buybacks of that sort, Einhorn says, “is less desirable.”