A share buyback, also known as a stock buyback or share repurchase, is when a company buys back its own outstanding shares to reduce the number of shares available on the open market. This represents an alternate and more flexible way of returning money to shareholders, relative to dividends. When used in coordination with increased corporate leverage, buybacks can increase share prices. In most countries, a corporation can repurchase its own stock by distributing cash to existing shareholders in exchange for a fraction of the companys outstanding equity. The company either retires the repurchased shares or keeps them as treasury stock, available for re-issuance.
A share buyback can be beneficial for a company if it has no reason to fund expansions or other projects or wants to influence its share price in the market. Share buybacks enable companies to raise shareholder value, and under normal market conditions, the portion of profits a company uses to buy back shares should strengthen its share price. Shareholders usually want a steady stream of increasing dividends from the company, and one of the goals of company executives is to maximize shareholder wealth. However, company executives must balance appeasing shareholders with staying nimble if the economy dips into a recession.
A share buyback can demonstrate to investors that the business has sufficient cash set aside for emergencies and a low probability of economic troubles. Reducing the number of shares outstanding on the market increases the proportion of shares owned by investors. A company may feel its shares are undervalued and do a buyback to provide investors with a return. The share repurchase reduces the number of existing shares, making each worth a greater percentage of the corporation. Another reason for a buyback is for compensation purposes. Companies often award their employees and management with stock rewards and stock options, and a buyback helps avoid the dilution of existing shareholders.
In summary, a share buyback is when a company buys back its own outstanding shares to reduce the number of shares available on the open market. It is an alternate and more flexible way of returning money to shareholders, relative to dividends. When used in coordination with increased corporate leverage, buybacks can increase share prices. A share buyback can be beneficial for a company if it has no reason to fund expansions or other projects or wants to influence its share price in the market. It can demonstrate to investors that the business has sufficient cash set aside for emergencies and a low probability of economic troubles.
