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Share Repurchase



Definition

A share repurchase or buyback is a decision made by a corporation to buy back its own shares from the marketplace. It reduces the number of shares available on the open market, thereby increasing the proportion of shares owned by the remaining shareholders. This action often signals the corporation’s belief that its shares are undervalued, and is a way to return money to shareholders without the tax liabilities of increased dividends.

Phonetic

The phonetic pronunciation of “Share Repurchase” is: /ʃer riːˈpɜːrʧɪs/

Key Takeaways

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  1. Improvement in Financial Ratios: Share repurchases can improve a company’s financial ratios. When a company buys back its shares, it decreases the number of outstanding shares, which in turn increases earnings per share (EPS) and return on equity (ROE).
  2. Return Value to Shareholders: Share repurchase is an efficient way to return value to stockholders. Companies with excess cash reserves often use share buybacks as an alternative to dividends, helping to return profits back to their investors.
  3. Confidence in company’s value: When a company repurchases its own shares, it is often seen as a sign of confidence by the management in the company’s potential growth and performance. The market usually perceives this as a positive sign, which might drive up the stock price.

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Importance

Share repurchase, also known as a buyback, is an important business/finance term as it’s a strategic move companies make to invest in themselves. When a company repurchases its own shares from the open market, it reduces the number of outstanding shares circulating, hence increasing the proportion of shares an investor owns without needing to purchase more. This also implies that the company believes the shares are undervalued. Essentially, this boosts earnings per share (EPS), which could lead to an increase in share price over time, benefiting investors. Such actions can also show the firm’s strong financial health by demonstrating it has excess cash on hand, making it an attractive venture for potential investors.

Explanation

Share repurchase, also known as a buyback, is a strategy employed by corporations subsequent to substantial evaluation of their current and prospective financial standing. Companies use share repurchase as a method to reinvest in themselves, essentially by buying back shares of their own stock. By using the company’s accumulated cash, they reduce the number of outstanding shares in the public stock market. This reduces the overall equity base of the company, leading to an increase in the percentage ownership of remaining shareholders. The fundamental purpose of share repurchases is to make capital allocation adjustments that management believes will enhance shareholder value. Corporate executives have the flexibility to buy back shares when they perceive them as undervalued, representing a potentially more beneficial application of company funds than reinvesting in regular business operations. Additionally, share repurchases also function as a mechanism for companies to counteract dilution and distribute surplus capital back to the shareholders. Hence, implementing repurchases often signal a company’s optimistic outlook about its future financial health.

Examples

1. Apple Inc: The tech giant has consistently employed share repurchase as a part of its capital allocation strategy. Between 2012 and 2019, Apple repurchased over $320 billion of its own shares, aiming to return capital to their shareholders and possibly to increase their value of remaining shares in the market as their earnings are shared over fewer outstanding shares.2. IBM: IBM had announced a $4 billion share repurchase program in October 2016. This shows the company’s intention of using their excess profit to buy back their stocks, which in some cases can be a tactic to improve earnings per share and return value to shareholders.3. McDonald’s: The fast food chain announced in 2015 a share repurchase program as part of its strategy to return between $8 billion and $9 billion to its shareholders. Over the years, McDonald’s has continued to use share repurchases as a way to return money to its shareholders.

Frequently Asked Questions(FAQ)

What is a Share Repurchase?

A share repurchase, also known as a stock buyback, is an action taken by a corporation to buy back its own shares from the marketplace, which reduces the number of outstanding shares.

Why do companies engage in Share Repurchasing?

Companies repurchase shares to return excess cash to shareholders, increase financial metrics like earnings per share (EPS), limit dilution, support stock price, or for strategic reasons.

How does a Share Repurchase work?

When a company wants to repurchase shares, it announces a share buyback program and then buys the shares on the open market or offers shareholders a fixed price to purchase their shares.

What is the impact of a Share Repurchase on a company’s financials?

When a company repurchases its own shares, the number of outstanding shares reduces. This increases the earnings per share (EPS) and the return on equity (ROE) if the net income remains constant.

What are the different methods of Share Repurchase?

There are primarily two methods of share repurchase: open market purchases and tender offers. In open market purchases, the company buys its own shares on the stock market, whereas a tender offer is a direct offer to shareholders to buy their shares at a specific price.

Is a Share Repurchase always a good sign?

A share repurchase can be seen as a positive sign that a company believes its shares are undervalued. However, it might also indicate a lack of other productive opportunities to invest in, suggesting weaker potential future growth.

How does Share Repurchase impact the individual shareholder?

For an individual shareholder, a share repurchase can potentially increase the value of the remaining shares, assuming that the company’s total value doesn’t change. However, there might also be tax consequences depending on individual circumstances.

How does a company finance Share Repurchases?

Companies can finance share repurchases through their retained earnings, issuing debt, or using cash reserves. Primarily, it depends on the company’s current financial status and its financial management strategies.

Related Finance Terms

  • Buyback of Stock
  • Treasury Stocks
  • Equity Reduction
  • Shareholder Value
  • Open Market Repurchase

Sources for More Information


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