Share Buyback
Term of the Day - 21 February 2024
Today’s Term is “Share Buyback”.
A share buyback, also known as a stock repurchase, is a corporate action where a company purchases its own outstanding shares from the market, using its cash reserves or by borrowing money. The bought-back shares are either retired, which reduces the total number of shares outstanding, or held in the company's treasury for potential reissue at a later time.
Companies typically undertake share buybacks for several reasons.
Firstly, it signals to investors that the company believes its stock is undervalued and can represent a sound investment opportunity.
Secondly, buybacks can enhance shareholder value by boosting earnings per share (EPS) metrics since the same earnings are distributed over fewer shares, potentially increasing the stock price.
Additionally, buybacks may offer a tax-efficient means of distributing excess cash to shareholders compared to dividends (depending on applicable local tax laws).
However, critics argue that companies sometimes use buybacks to artificially inflate stock prices or to meet short-term financial targets, which may not necessarily align with long-term value creation. Furthermore, buybacks could deprive companies of capital that could otherwise be invested in research and development, expansion, or employee compensation.
Overall, share buybacks remain a strategic tool in corporate finance, employed to manage capital structure, signal confidence, and potentially enhance shareholder returns, albeit with both benefits and risks.
