What’s a share buyback programme? (2024)

FAQs

What is a share buyback Programme? ›

A share buyback is when companies buy back their own shares from the market, cancel them and, ultimately, reduce share capital. With fewer shares in circulation, each shareholder gets both a larger stake in the company and a higher return on future dividends.

A stock buyback, or share repurchase, is when a company repurchases its own stock, reducing the total number of shares outstanding. In effect, buybacks “re-slice the pie” of profits into fewer slices, giving more to remaining investors.

Example of a Buyback

Trading at a $20 per share stock price, its P/E ratio is 20. With all else being equal, 100,000 shares would be repurchased and the new EPS would be $1.11 or $1 million in earnings spread out over 900,000 shares. To keep the same P/E ratio of 20, shares would need to trade up 11% to $22.22.

A buyback can benefit investors because they receive their capital back and are often paid a premium over the stock's market price. In addition, there is a boost in the share price for investors who still hold onto the stock; however, buybacks aren't necessarily always good for investors.

A buyback of shares occurs when a company purchases its own shares in the stock market. Through buyback, a company takes outstanding shares off the market and returns capital to investors. It can be done through a tender offer or an open market offer.

While dividend payments are perhaps the most common way to return cash to shareholders, there are advantages to stock buybacks: Directly boost share prices. The main goal of any share repurchase program is to deliver a higher share price.

Disadvantages. A criticism of buybacks is that they are often ill-timed. A company will buy back shares when it has plenty of cash or during a period of financial health for the company and the stock market. The stock price of a company is likely to be high at such times, and the price might drop after a buyback.

Do I Have To Sell My Shares in a Buyback? As a shareholder you are not required to sell your shares back to the company in a share buyback; the company cannot make you do so; however, companies do offer a premium over the market price of the share to entice investors to sell.

A buyback can be in two types. Tender offer or open market offer. In the tender option, investors have the option to submit a request to sell a percentage or all shares they hold at a price higher than the current market price. The share buyback price is pre-decided by the company.

A shareholder is eligible for all corporate action benefits, including buyback, even if the shares are pledged. However, the shares need to be unpledged before tendering them in the buyback.

What is the process of share buy back? ›

The share buy-back process begins when a company decides to make an offer to buy back some of its own shares. Where shareholders accept this offer, their shares are sold back to the company at which point the company immediately cancels the shares (thereby reducing the total number of shares the company has on issue).

Buybacks trigger a firm-level excise tax liability, but dividends do not. Shareholders face individual-level taxes on dividends and realized capital gains, though a fraction of their equity is held in tax-preferred vehicles (e.g., retirement accounts) and is thus shielded from tax.

For most of the 20th century, stock buybacks were deemed illegal because they were thought to be a form of stock market manipulation. But since 1982, when they were essentially legalized by the SEC, buybacks have become perhaps the most popular financial engineering tool in the C-Suite tool shed.

Contrary to the common wisdom, buybacks don't create value by increasing earnings per share. The company has, after all, spent cash to purchase those shares, and investors will adjust their valuations to reflect the reductions in both cash and shares, thereby canceling out any earnings-per-share effect.

With this buyback, you may purchase fewer shares, sell them back for more, and quickly realize a profit on your investment. The company is repurchasing shares at a lower cost than the current market price. As a result, the price of this corporation will probably keep increasing in the future.

Key Takeaways. Companies do buybacks for various reasons, including company consolidation, equity value increase, and looking more financially attractive. The downside to buybacks is they are typically financed with debt, which can strain cash flow.

If your company pays out a dividend, shareholders retain their shares and receive cash. If your company repurchases shares, the selling shareholders receive cash, and the remaining shareholders have shares with higher value (but they don't receive any cash).

Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Exxon Mobil Corporation (NYSE:XOM) are some of the best dividend stocks with the biggest buyback programs.