What is a ‘Share Buyback’
A Share buyback, also known as a share repurchase, is when a company buys its own outstanding shares to reduce the number of shares available on the open market. Companies buy back shares for a number of reasons, such as to increase the value of remaining shares available by reducing the supply or to prevent other shareholders from taking a controlling stake.
BREAKING DOWN ‘Share Buyback’
A buyback allows companies to invest in themselves. Reducing the number of shares outstanding on the market increases the proportion of shares owned by investors. A company may feel its shares are undervalued and do a buyback to provide investors with a return. And because the company is bullish on its current operations, a buyback also boosts the proportion of earnings that a share is allocated. This will raise the stock price if the same price-to-earnings (P/E) ratio is maintained.
Another reason for a buyback is for compensation purposes. Companies often award their employees and management with stock rewards and stock options; to make due on rewards and options, companies buy back shares and issue them to employees and management. This helps avoid the dilution of existing shareholders.
How Companies Perform a Buyback
Buybacks are carried out in two ways:
1. Shareholders might be presented with a tender offer, where they have the option to submit, or tender, all or a portion of their shares within a given time frame at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding onto them.
2. Companies buy back shares on the open market over an extended period of time and may even have an outlined share repurchase program that purchases shares at certain times or at regular intervals.
A company can fund its buyback by taking on debt, with cash on hand or with its cash flow from operations.