Why do companies buy back shares


    Why do companies buy back shares

  • 1 They believe the company will perform well

    A company can buy back its shares because it believes that the company will perform well in the future. By buying back their own shares a company can make some profit if those shares went up.

  • 2 To give investors some faith

    Sometimes companies buy back shares to give investors some faith in the future of the company. When investors find a company buying back its own shares they can easily believe that the company expects some good results in the near future.

  • 3 The best use of capital

    A company can buy shares when it has no place to invent the additional cash it holds. Because public companies are always pressured to maximize shareholders's wealth they have to keep their money moving.

  • 4 To improve financial ratios

    Many of the financial ratios investors focus on include the number of shares in their calculations. When a company buys back its shares it reduces the number of shares available and so can directly affect those ratios (See also why stock prices don't always reflect the business value).

  • 5 To reduce dilution

    Executives are usually compensated with stock options in additions to their salaries. When the number of shares are reduced the value of the shares Executives hold become higher. If a company bought its share for that sole purpose then it might be a warning sign.

  • 6 To prevent acquisition

    When an aggressive bidder attempts to acquire a company managers might want to discourage that acquirer. This can be done by raising the stock price so that it can become unattractive to the buyer. This is a very rare case because usually companies welcome acquisition offers.

  • 7 Tax benefit

    In the past buying back shares was subjected to less tax than dividends distribution. Companies that wanted some tax advantages sometimes bought their own shares.

  • 8 To push share prices up

    When a company announces that it's buying back its shares people usually start buying more shares of that company as well because of believing that the company's stock will go up.

  • 9 To benefit shareholders

    When a company buys back shares it reduces the amount of float available (the number of publicly traded shares). This in turn increases Earnings per share for each stock holder.

  • 10 To improve growth rate

    If the company couldn't grow its earnings by a good rate it might purchase its own stock with the goal of raising earning per share growth (EPS). Because the profit will be distributed on a smaller number of shares the company might seem more profitable that it really is.

  • 11 Not always a good sign

    Share repurchases can happen for both good and bad reasons. An investor should not base his decision to buy a stock on a company's share buyback announcement.