What is a Share Repurchase?
The share repurchase is also known as Share Buyback. It is a transaction whereby a company buys back its own shares from the marketplace. A company might repurchase its own shares if management considers it undervalued. Share repurchases reduce the number of outstanding shares, which increases both the demand for the shares and the price.
Key points:
It is a decision by a company to buy back its own shares from the marketplace
To boost the value of the stock and to improve the financial statements.
When a company have cash on hand and the stock market is on an upswing
Risk:
There is a risk that the stock price could fall after a share repurchase.
Reasons:
Share repurchases are done by the company due to the following reasons:
- To reduces the total assets of the business. Thus improving its return on assets, return on equity, and other key financial ratios
- To grow earnings per share (EPS), revenue, and cash flow more quickly, as the number of shares outstanding decreases.
- If the same amount of total money is paid to shareholders annually, as dividends, then the total number of shares decreases.Each shareholder receives a larger annual dividend.
- If the corporation grows its earnings and its total dividend payout, decreasing the total number of shares further increases the dividend growth.
- Share repurchases fill the gap between excess capital and dividends so that the business returns more to shareholders without locking into a pattern
Advantages
The shares repurchase reduces the number of existing shares, making each worth a greater percentage of the corporation
The stock’s EPS increases while the (P/E) decreases or the stock price increases.
Disadvantages
The price might drop after a buyback. A drop in the stock price can imply that the company is not so healthy after all.
A share repurchase can give investors the impression that the corporation does not have other profitable opportunities for growth.
Repurchasing shares puts a business in a precarias situation if the economy takes a downturn or the corporation faces financial obligations that it cannot meet.
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