UPDATED: April 2022
4 Reasons Investors Like Share Buybacks – Companies that are successful generally get to a position where they generate more cash than they can reinvest back into the business. The market conditions have meant that investors are now putting pressure on companies to distribute all the wealth they have accumulated back to their shareholders. In general, companies have several options for returning wealth to shareholders by using dividends, stock price appreciations, or share buybacks.
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Dividends had been the commonly used form of distributing wealth to shareholders, but in recent times, buybacks have been seen as the best option for returning extra cash flow. Buybacks are valuable to investors who can turn their shares into gains in the future and defer on taxes. Buybacks also tend to benefit investors by returning money to shareholders efficiently and by increasing the prices of the shares. Here are some more reasons why investors like share buybacks:
Profitable companies can use several ways to measure the performance of their stocks, but the most common measurement is going to be earnings per share (EPS). These are generally viewed as the most important variable when determining the prices of shares. When companies start to use share buybacks, they will be reducing assets on their balance sheets and improves their return on assets. Taking this measure reduces the number of shares outstanding and maintains a similar level of profitability.
Share prices can decrease when the economy isn’t doing well due to weaker than expected earnings. When this happens, a company will think about using a share buyback program as it believes that the shares of the company are undervalued. Most businesses will repurchase their shares and then sell them in the market when the price increases to reflect the company’s actual value. When the earnings per share start to increase, it will be seen positively by the market, and when buybacks are announced, it will raise share prices.
When there is excess cash used for buying back the company stock, rather than using it to raise dividend payments, it will allow shareholders to get rid of capital gains when the share prices increase. In general, buybacks aren’t highly taxed when compared to dividends, and this is good news for investors who are trying to get the maximum profit. They will not have to worry about paying a lot of taxes when they are buying back shares.
Investors get the message that the company has excess cash on hand when they know that the company has started a buyback program. This development means that investors don’t need to worry about cash flow problems and can concentrate on other matters. It also gives investors the signal that the company wants to use cash to reimburse shareholders rather than reinvesting in assets.
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Stock Buybacks (Share Repurchases) by Public Corporations (ie. Apple, Tesla, Netflix, Meta (Facebook), Microsoft, etc.)
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