The Pros and Cons of Share Buybacks for Investors
UPDATED: March 2022
The Pros and Cons of Share Buybacks for Investors - In general, public companies tend to be interested in share buybacks when the share prices are low, and there are greater chances of profitability.
The Pros and Cons of Share Buybacks for Investors
Share buybacks tend to boom when there is an economic downturn, but it's not always advantageous for investors. To prove that point, we will be looking at some of the pros and cons of share buybacks for investors.
Pros of Share Buybacks
Rising Dividends
Companies get the chance to raise dividend payments after a buyback mainly because fewer shares are available on which the company has to pay dividends.
Boost in Share Prices
Investors can gain a short-term bonus from share buybacks. The repurchase means that there are fewer shares available for trading in the market. That raises the share price, and the shares will be worth more in the short term.
Less Excess Cash
If a company has excess cash saved in a money market account, they aren't profiting from that money. It will earn a low-interest rate, which is a small part of the company's profitable activities. Overall performance can improve when that excess cash is removed from the company books.
Better Earnings per Share
When companies announce profits, they tend to track their performance by looking at the earnings per share. The EPS numbers rise when there are fewer shares trading on the market, which helps companies drive higher stock prices and beat market expectations for their performance.
Positive Psychology
When a company starts to repurchase shares, it is a sign to investors that the company believes the shares are undervalued. That can kick start an upward swing in stock prices.
Cons of Share Buybacks
Poor Use of Capital
When a company is spending millions on share repurchase, investors should ask, "why the company isn't doing something better with their money?" Each dollar used to buy back shares is a dollar that isn't being used to develop a new product, acquire a competitor, hire new employees, ramping up marketing, or investing in growing the business.
Sinking Dividends
At times companies can cut their dividends when they are spending money on share buybacks. That's because the company will have less cash to hand out in quarterly dividends after share buybacks. Investors who rely on dividend checks for income will suffer the most.
Poor Predictions
Although companies can buy back their shares when the price is low, it doesn't happen most times. Predicting the stock market can be tricky. Companies can buy back shares at their highest value, which makes the share repurchase a bad use of their capital.
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Stock Buybacks (Share Repurchases) by Public Corporations (ie. Apple, Tesla, Netflix, Meta (Facebook), Microsoft, etc.)
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