Quantitative way to show the benefit of share buyback vs investment
Is there another way to give a quantitatively-backed answer to the question of whether a company should buy back shares or use the cash to re-invest, besides comparing their ROI on investment to the discount on the share price?
For example for a company that uses NAV as a valuation measure, if the shares are trading at a 30% discount to 1yr forward NAV clearly there's justification to consider a share buyback. But one company I'm looking at for example is trading at around that level but the management team are still saying they'd prefer to continue investing into their project pipeline at around 7% yield on cost. I can see that on a long-term view it MAY be better to reinvest to grow the company, but if management don't see it worth buying their own shares at a 30% discount then it implies they don't think the actual discount is that much?
If a hedge fund PM asked this question, how would you answer? It seems silly to suggest investing at 7% is better than buying shares at a 30% discount, but clearly the management team think that's the right thing to do.
Bump
If you are using excess cash for a buyback that otherwise would just be sitting on the balance sheet, the buyback mechanic in itself doesn’t change intrinsic value. But what it will do is it increases shareholder equity position returns more assuming the intrinsic value is reached all else equal since it’s anti dilutive. You would then compare the additional return to the incremental shareholder equity return of investing in the business.
That is why they say a buyback is a sign of confidence that a stock is undervalued because you would only do it if the math above worked out.
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