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What Are Share Buybacks?

UPDATED: April 2022

What Are Share Buybacks? – Companies can distribute cash to their stockholders through share repurchase, but for these to be effective, share buybacks have to be done at the right time and for the right reasons.

Share buybacks are one-way stockholders can cash in on an investment. Still, anyone considering selling their holdings should try to understand why a company is choosing to buy back stock and how that move may affect its prospects. Share buybacks can be beneficial, but whether you win or lose when presented with a tender offer will partly depend on the state of the company’s balance sheet and its growth prospects.

What Are Share Buybacks?

A share buyback or repurchase is when a company puts out a tender offer telling shareholders it’s willing to buy back its shares at a certain price. That price is usually higher than what the stock is currently trading at. Shareholders can then submit written offers, which the company can accept or reject, as it tries to buy back its stocks at the lowest price.

Share buybacks can be done on the open market, but it’s not the preferred option for most companies since this tends to increase the share price. If a company announces that they will buy back shares, the price jumps very often because (it’s seen as a sign) that the company believes that the stock is undervalued.

Why Would a Company Buy Back Its Shares?

While there are several reasons why a company might repurchase its shares, the only reason it should is if its leadership does believe that the shares are undervalued. If it’s the other way around, it will be detrimental to the existing shareholders. However, companies can also opt to buy back shares to reduce their cost of capital.

That’s because a company’s capital structure comprises equity, debt, and existing cash. This cash from operations is the cheapest source of capital, but it’s also the money the company may need for ongoing operations and growth. Debt is the second cheapest form of capital the company has, followed by equity – its shares – which is the most expensive.

More Reasons Why a Company Would Do a Share Repurchase?

Sometimes if they repurchase their shares, especially if their shares are undervalued, they can reduce their cost of capital and get a more preferred capital structure. It’s also a way to give shareholders cash other than a dividend. A company may also be tempted to buy back shares if it feels its stock is being unfairly beaten down in the market and wants to stop the losses.

A company may do a share repurchase to make its financial ratios look better, given that buying back shares will reduce the earnings per share but increase the price earning, or P/E, ratio. This can also increase the company’s return on equity because there is less equity.

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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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