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Float Shrink
Float Shrink
Float Shrink
The term "float shrink," however, is most commonly associated with share
buybacks, as this is a popular way for companies to return cash to shareholders.
A float shrink achieved through a share buyback also reduces the total number of
shares outstanding for a company, which has a positive impact on earnings per
share (EPS) and cash flow per share.
KEY TAKEAWAYS
Note that while float shrink can also be achieved through a strategic investor's
acquisition of a large stake in a company, this does not have the same positive
impact as a buyback, because the total number of shares outstanding remains
the same.
Example of Float Shrink
A recent example of float shrink is Apple (AAPL), which executed several share
buybacks in 2018 and 2019. During the quarter ending December 28, 2019,
Apple bought 70.4 million shares from investors at an average price of $284. In
total, the Cupertino company spent $20 billion on the repurchase program.2 In
January 2020, it reported results that exceeded analyst expectations. By then its
stock price had jumped by 12% to $327 (before a 4-to-1 share split).3
As an example of how float shrink can impact EPS, consider a company that has
50 million shares outstanding, with a float of 35 million shares. The shares are
trading at $15, for a market capitalization of $750 million. The company reports
net income of $50 million in a given year for an EPS of $1. In the following year, it
buys back 5 million of its shares on the open market. This buyback amounts to
10 percent of its total outstanding shares, or 14.3 percent of the float (i.e. 5
million ÷ 35 million). As a result, it now has 45 million shares outstanding at the
end of the second year.
Assume the company achieves net income of $55 million in the second year.
While net income has increased 10 percent because of the share buyback, EPS
is now at $1.22 (i.e. $55 million ÷ $45 million), an increase of 22 percent.
Recall that shares were trading at $15 at the end of the first year, for a price-
earnings ratio (P/E) of 15. Assuming that the P/E ratio is unchanged at the end of
the second year, the shares should be trading at $18.30 (i.e. P/E of 15 x EPS of
$1.22).