Definition
A share repurchase or buyback is a decision by a corporation to buy back its own shares from the open market. This reduces the number of outstanding shares, resulting in an increase in remaining shareholders’ proportionate ownership and earnings per share. Companies typically do this when they believe their shares are undervalued or want to improve financial ratios like return on assets or equity.
Key Takeaways
- Share Repurchase Buyback is a process where the company decides to purchase its own shares back from the marketplace. This action portrays the confidence that the company has in itself, the act typically leads to the ascent of the remaining shares’ value.
- It significantly impacts the equity structure of a company by reducing the number of outstanding shares on the market. This reduction in share number can result in an increased earnings per share and financial ratios.
- Share Repurchase is flexible as it doesn’t oblige the company to repurchase shares immediately or in a set timeframe. However, it is a strategic move, often used when management believes their shares are undervalued to maximize shareholder value.
Importance
The finance term ‘Share Repurchase or Buyback’ is important as it is a strategy used by corporations to reinvest in their own businesses by buying back their own shares from the marketplace. The primary objective of share repurchases is to optimize the company’s capital structure, improve financial ratios/performance, and to enhance shareholder value.
By reducing the number of outstanding shares, buybacks can increase earnings per share (EPS), leading to a higher market price per share. Further, this strategy demonstrates the firm’s confidence in its own value, as the company believes that its shares are undervalued, thus potentially attracting investors.
Apart from that, corporations may opt to use their excess cash for buybacks when they view other investment opportunities as less attractive. Hence, share repurchase programs often signal positive financial health and strong future prospects of a company.
Explanation
One of the major purposes of a share repurchase or a buyback is to reinvest in the company itself. When a company feels it has enough cash on hand, or it can borrow enough with a net benefit, it may decide its own stock is a good investment and that buying back shares might help improve the financial outlook.
This is often done when profits are strong and the company wants to share its success with stockholders. A buyback can increase earnings per share, reduce the equity capital, and thereby increase return on equity.
Share repurchase is also used effectively as a tool to counteract the dilution of earnings that occurs when employees exercise stock options. By purchasing its own shares, the company can reduce the number of outstanding shares and thereby lessen the diluting impact of the new shares entering the market.
In some cases, a company may buy back shares to demonstrate confidence to investors and the market when the share price is underperforming, signaling the belief that the stock is undervalued. Ultimately, the use of a stock buyback depends on a company’s financial strategy and market conditions.
Examples of Share Repurchase Buyback
Apple Inc.: In 2012, Apple initiated a share buyback plan, with the announcement to repurchase $10 billion of the company’s stock. This plan was later expanded several times, and by 2019, Apple’s board authorized buybacks worth up to $175 billion, making it one of the largest repurchase programs in corporate history. The company’s share repurchase strategy was aimed to return capital to shareholders and manage dilution of shares related to employee compensation plans.
Exxon Mobil Corp.: Exxon is historically one of the most aggressive firms in conducting share buybacks. For instance, in the period from 2013 to 2017, the energy giant repurchased around $13 billion of its own shares, mainly as an attempt to boost earning per share ratios and shareholder returns, amidst volatile oil and gas prices.
Alphabet Inc. (Google): In 2019, Alphabet, the parent company of Google, announced a share buyback program of up to $25 billion of its Class C capital stock. This represented a significant increase from its past share buyback plans, reflecting the company’s robust performance and confidence in its future growth.These examples suggest that share repurchases or buybacks are a common strategy used by large companies to return capital to shareholders and manage share dilution.
FAQ – Share Repurchase Buyback
What is Share Repurchase Buyback?
Share Repurchase or Buyback is a transaction where a company buys back its own shares from the marketplace. This reduces the number of outstanding shares, increasing the ownership stake of remaining shareholders.
Why would a company repurchase its own shares?
A company might choose to repurchase its shares for several reasons. These could include taking advantage of perceived undervaluation of the stock, to signal management’s confidence in the company, to thwart a hostile takeover, or to use up cash that is surplus to requirements in a way that returns value to shareholders.
How does a Share Repurchase Buyback affect shareholders?
When a company buys back shares, the remaining shares in circulation become more valuable. This is because existing shareholders now have a larger claim on the company’s assets and profits. Therefore, shareholders could potentially realize a capital gain if they chose to sell their shares after a buyback.
Can a company repurchase all its shares?
No, a company cannot repurchase all its shares. A company needs to have some shares on the open market to maintain its status as a publicly traded entity.
Is share repurchase good or bad?
Whether a share repurchase is good or bad often depends on the specific circumstances. If done for the right reasons, such as taking advantage of undervalued stock or to utilize surplus cash effectively, it can be beneficial for a company and its shareholders. However, if it’s done to manipulate the stock price or to inflate earnings per share, it might not be in the best interest of shareholders.
Related Entrepreneurship Terms
- Outstanding Shares: These are the shares currently held by all the shareholders of a company, including institutional investors and restricted shares held by insiders and officers.
- Treasury Shares: These are the shares that a company has repurchased and are available for resale or cancellation.
- Earnings Per Share (EPS): It’s a measure of profitability that’s calculated by dividing net income by number of outstanding shares. EPS often increases after a share repurchase due to the reduced number of outstanding shares.
- Dividend Distribution: These are payments made by a corporation to its shareholders out of its profits. A company may decide to buy back shares instead of paying dividends, often to deliver immediate value to its shareholders.
- Stockholders’ Equity: It is the residual interest in the assets of a company after deducting liabilities. It can be affected by a share repurchase as treasury shares are deducted from stockholders’ equity.
Sources for More Information
- Investopedia – A comprehensive resource for investing and personal finance education. It provides information on share repurchase buybacks.
- CNBC – A leading source of business and financial news. It offers articles on share repurchase buybacks and related topics.
- Bloomberg – A premier site for updated business news and financial information. It offers data and articles on share repurchase buybacks.
- Moneycontrol – One of India’s leading financial information source for shares, commodities, and personal finance. It offers articles and guides about share repurchase buybacks.
