When it comes to deciding what to do with excess cash, companies have numerous alternatives. One of the ones that adds the most value to the shareholder is share buyback, which is a program through which companies decide to take part of their own shares off the market. Whether through the market or with an offer.
What is a share buyback or repurchase?
The purchase of its own shares by the issuing company is called a share buyback. Once the shares are returned to the issuer, they are considered null (destroyed). It is also a method for titles to leave the stock market and stop operating. They prevent others from making decisions, which could be useful if you want to protect the company from financial damage.
According to the capital market, a share buyback is something positive, since the share price can rise as a result. This is especially interesting for shareholders because it offers them an economic benefit.
The company can buy back its shares on the stock market like any other investor or make a public offer to buy its shares. This option of reselling its shares to the company usually entails an additional return on the value of the shares.
Why does a company do share buybacks?
The fundamental reasons that can lead a company to buy back its own shares are:
- It has no better investment opportunities within the company. New projects are already covered, and no new cash needs are foreseen.
- Trust in the evolution and development of the company. If they thought the company was going to go wrong, they wouldn’t invest, and no one has more information than the company’s executives about its growth prospects or the level of actual profits they foresee.
- They consider it the best investment alternative. Above deposits, funds, bonds, or other companies.
- They understand that the company is cheap, in relation to the profits generated, and its quotation price.
- They create more value for shareholders. By obtaining the same benefit for a smaller number of shares, we will obtain a greater EPS, generate greater profitability through dividends, and maintain the same payout.
How can they carry out the repurchase of shares?
The company has different options when it comes to repurchasing shares.
- You can buy them directly on the stock exchange.
- You can launch a takeover bid, announcing the characteristics of the operation.
- You can inform the company of the number of shares you want to acquire, and the price range at which you will buy them, then shareholders will send sale offers, and the company will acquire the shares at the lowest prices offered, within the marked range.
When investors buy stocks, they mostly do it through a stock order. Learn all about stock orders in this article: types of stock orders.
What consequences will the repurchase of titles have on the value of the share?
Generally, the repurchase of shares entails an increase in value. With more demand in the market, the price of the securities will tend to rise, in addition to the confidence generated in the company by its executives, which is usually understood as something positive. Although it will depend on the sector in which it operates, if we talk about a growing sector and the company does not have investment opportunities, the shareholder will value it negatively in the long term, since it should be increasing its value, carrying out projects with VAN.
As an investor, your chances of being contacted by your issuing company is higher when you are a significant shareholder.. This is why most passive investors are mostly focused on researching the best dividend yield stocks, rather than obsessing about which company does buybacks.
A practical example would be the case of Apple
On April 23, 2014, Apple announced that it was going to buy 130,000 million dollars in shares. For shareholders, this meant a significant increase in BPA, and so they understood it, That same day, the quotation rose 6.15 percent, or 8.20%. And since then until now, about 11 months later, it has accumulated a return of 66%. Therefore, the repurchase of shares will be a very important factor that the shareholder will have to take into account when investing in a particular company.
Pros and cons of this stock operation
Let’s see the possible positive and negative consequences of the repurchase of company titles
|Advantages of Stock Repurchase||Disadvantages of Stock Repurchase|
|✅ Greater decision-making power for the company||❌ Paying an excessive price and losing a lot of money in the operation|
|✅ Revaluation of the company’s securities||❌ Risk of a possible global crisis affecting them|
|✅ Does not affect dividends|
What happens to the repurchased shares?
Repurchased shares are considered null and destroyed once returned to the issuer. This action effectively reduces the number of outstanding shares in the market.
Why is a share buyback considered positive in the capital market?
Share buybacks are seen as positive in the capital market because they can lead to an increase in the share price. This can benefit shareholders by enhancing the value of their investments.
Are share buybacks the same as dividends?
No, share buybacks and dividends are different methods of returning value to shareholders.