3 Reasons Why A Company Should Consider Share Buybacks

UPDATED: March 2022

3 Reasons Why A Company Should Consider Share Buybacks - An increasing number of companies are announcing share buybacks. The directors may believe that share buyback will positively impact shareholders and the business as a whole.

3 Reasons Why A Company Should Consider Share Buybacks

That's why we will be looking at some of the most common reasons why a company would want to repurchase its shares and what benefits the shareholders will get as a result.

1. Take Advantage of Undervalued Share Price

One of the main reasons a company would think about repurchasing its shares is when the management believes that the company's current shares are undervalued in the market. So, instead of keeping cash in the bank, the management decides to repurchase shares of the company at what they believe is a low price. There are two effects this buyback will have on the stock of the company:

  • The number of outstanding shares is reduced, and the pressure to buy increases as the company is buying its shares.
  • Management reassures the market that they are confident in their business operations when they spend millions to buy back their shares.

These two effects encourage investors to buy shares of the company. The market thinks that the management is only buying their shares because they believe that the value of these shares will rise in the future.

2. Increase Ownership and Reduce Dilution

Companies start issuing new shares over time through capital raising, or by exercising options, which reduces the dilution of existing shareholders. When a company repurchases its shares, it reduces the impact of that dilution. Reducing the number of outstanding shares also increases the ownership of the management of the company.

3. Enhancing Financial Ratios

Even though enhancing the financial ratios of the company isn't the main reason for share buybacks, it is often a benefit that they gain when engaging in this activity. When the number of outstanding shares is reduced, it has a positive impact on the different ratios that are closely tracked in the market. These are known as the Return on Asset (ROA), Return on Equity (ROE), and Earnings per Share (EPS).

How Can Shareholders Benefit from a Share Buyback?

Share buybacks are a strategy from the capital management and are seen as a reward or benefit to shareholders. Even though investors benefit from dividends, when money is directly deposited into the bank account of the shareholder, there are indirect benefits of share buybacks. We have already highlighted that reducing the number of outstanding shares in the market increases the share price.

Conclusion to 3 Reasons Why A Company Should Consider Share Buybacks

The company returns cash to the shareholders and provides investors with the chance to cash in on their investment. The management shows their confidence in the company, which positively affects the market sentiment regarding the stocks.


About the Author & How YOU Can Profit: This article is the copyrighted product of the team at BuybackAnalytics.com .

Buyback Analytics is a Top Tier Investing Platform to help investors find, analyze, and profit from investing opportunities not found through traditional investment tools. We specialize in this simple concept:  Follow the trades of Insiders - CONSISTENTLY PROFITABLE Traders, Investors, and Institutions because THEY get Inside Information that YOU don't:

LEGAL Insider Trading / Inside Traders (CEOs, CFOs, Corporation's Accountants & Attorneys, Politicians, etc.)
Stock Buybacks (Share Repurchases) by Public Corporations (ie. Apple, Tesla, Netflix, Meta (Facebook), Microsoft, etc.)
Market Moving Institutions (Examples: Market Makers, Investment Banks, Stock Brokerages, Hedge Funds, etc.)

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