Buyback Shares: Reasons, Advantages, and Disadvantages

Learn all about buyback shares and how best to use them for your advantage

UPDATED: April 2022

Buyback Shares: Reasons, Advantages, and Disadvantages – Buying shares is a financial engineering tool, and can be defined as a process of allowing a company to return to its shareholders and offer to buy the shares they own.

Buyback Shares: Reasons, Advantages, and Disadvantages

Share Buyback helps an organization make better use of its funds than by reinvesting those funds at a lower average rate into the same company or by needless divergence or purchasing growth through expensive acquisitions.

Reasons for Share Buyback

There are several reasons why a company would opt for buyback, and we are going to be sharing some of them with you here. These include the following:

  • To boost shareholder value, buying back offers a way of using the surplus funds of companies with unattractive alternative capital options. A reduction in the capital base resulting from buying back will typically produce higher earnings per share (EPS).
  • It is used as a defense mechanism in an environment in which the threat of company takeovers is real. Buyback offers insurance from a hostile takeover by increasing the assets of promoters.
  • It will encourage businesses to reduce their equity base, injected much-needed flexibility.
  • The intrinsic value of the shares is increased by a reduced floating stock ratio.
  • It would allow businesses to use buyback stock, without expanding their capital base, for subsequent utilization in the process of mergers and acquisitions.
  • Share buying is used as a financial engineering tool.
  • It is used to report the impact of buyback on the share price.

Benefits of Share Buyback

There are several benefits that your company can gain when they invest in share buyback, and we are going to highlight a few of them below.

  • Companies that are below their average industry profitability enjoy better share price appreciation after purchasing shares than companies with profitability above their industry average.
  • Companies whose sales growth was below their industry average had a higher share price rise after the repurchase of shares than those whose sales growth was above their industry average.
  • Rentable and developmental businesses that repurchase shares are a direct indicator to investors of the company’s strengths.
  • Repurchasing businesses with their lower debt ratios but sales growth rates above their average industry report significantly higher share price growth following repurchase than firms with above-average debt ratios but sales growth below their industry average.
  • Repurchasing companies with returns and debt ratios below their industry average display better share price growth after repurchasing than companies with income and debt ratios above their industry average.

Drawbacks of Share Buyback

The repurchase of shares is also criticized sometimes and we have highlighted the reasons for you below.

  • This might encourage unscrupulous promoters to use the money of the company to increase their stakes.
  • It opens up opportunities to control share prices.
  • It could distract the funds of the organization from productive investments.

Conclusion to Buyback Shares: Reasons, Advantages, and Disadvantages

A share buyback, also known as a stock repurchase, happens when a business sells its outstanding stock to minimize the number of free-market stock. For various purposes, corporations are buying back shares, for instance, to raise the value of remaining shares by reducing the supply or stopping other shareholders from taking control of shares.

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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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