What Is a Share Repurchase?

A share repurchase is a reduction in the number of a public company's shares outstanding. It's accomplished by buying a portion of its shares on the open market. The company might buy the shares directly or offer shareholders the option of tendering their shares at a fixed price.

Share repurchases automatically increase the 澳洲幸运5官方开奖结果体彩网:earnings per share (EPS) of the stock by reducing the number of outstanding shares. This can have the effect of driving up share value over time although that isn't an inevitable result.

How Share Repurchases Work

Companies have several goals🎶 when th🐼ey decide to do a share repurchase or buyback:

• An increase in 澳洲幸运5官方开奖结果体彩网:equity value
• A boost in the company's financial position
• Consolidation of its ownership

A share repurchase reduces the number of shares outstanding so it increases earnings per share (EPS). A higher EPS elevates the market value of the remaining shares. The shares are canceled or held as 澳洲幸运5官方开奖结果体彩网:treasury shares after repurchase so they're no longer held publicly and aren't outsta♔nding.

A share repurchase 澳洲幸运5官方꧅开奖结果体彩网:impacts a company's financial statements in various ways. It reduces a company's available cash which is then reflected on the balance she🃏et as a reduction by the amount the ♚company spent on the buyback.

The share repurchase also reduces 澳洲幸运5官方开奖结果体彩网:shareholders' equity by the same amount on the liabilities side of🤡 the balance sheet.

Investors can find out how much a company has spent on share repurchases in the company's quarterly earnings reports.

Reasons for Share Repurchases

A share repurchase reduces the total assets of the business so its return on assets, return on equity, and other metrics improve. Reducing the number of sh𒁃ares means earnings per share (EPS) grows more quickly as revenue and cash flow increase.

Each shareholder receives a larger annual dividend if the business pays out the same amount of money to shareholders annually in dividends and the ♏total number of shares decreases. Decreasing the total number of shares further increases the dividend growth ൲if the corporation increases its earnings and its total dividend payout.

Negative Perceptions

A buyback can be used to hide a slight decline in 澳洲幸运5官方开奖结果体彩网:net income. The EPS will rise irrespective of the financial state of the business if the share repurchase reduces the number of shares outstanding to a greater extent than the fall in ℱnet income.

Share repurchases fill the gap between excess capital and dividends so the business returns more to shareholders without locking into a pattern. Assume the corporation wants to return 75% of its earnings to shareholders and keep its 澳洲幸运5官方开奖结果体彩网:dividend payout ratio at 50%. The company returns the other 25% in the form of share repurcha෴ses to complement the dividend.

Advantages and Disadvantage♒s of Share Repurchases

Share repurchases are usually but𝔍 not always welco🦩med by shareholders.

Advantages

A share repurchase shows that the corporation believes its shares are undervalued and it's an efficient method of putting money in shareholders’ pockets.

The share repurchase reduces the number 𝐆of existing shares, making each worth a greater percen𝔉tage of the corporation.

The stock’s EPS increases so the price-to-earnings ratio✃ (P/E) will decrease assuming the stock price remains the same.

The value of the shares hasn’🔯t changed mathematically but the lower P/E ratio could make it appear that the share price represents a better value and this can make the stock more attractive to potential investors.

Disadvantages

A company will buy back shares when it has plenty of cash on hand or during a period of 澳洲幸运5官方开奖结果体彩网:financial health for the compan🔥y and the stock m☂arket. Those are not good reasons for some investors.

The stock's price is likely to be high at such times and the price might drop after a buyback. A drop in the stock price can be seen as an implication that the company isn't so healthy after all.

A share repurchase may also give investors the impression that the corporation doesn't have other profitable opportunities for growth. This can be an issue for growth investors looking for revenue and profit increases.

Repurchasing shares depletes the company's cash reserves, putting it in a precarious position if the economy takes a downturn or the corporation faces unexpected financial obligations.

Real-World Examples of Share Repurchases

Apple (AAPL) spent an astounding $100 billion repurchasing its stock during ꦡits fiscal 2024 year. There's no guarantee that this pace will continue but the company is sitting on $65 billion in free cash flow and short-term investments.

Two other tech giants, Alphabet (GOOG) and Meta (META), engaged in massive share buybacks in 2024.

The Bottom Line

Corporations often buy back their shares. Many shareholders approve because it often leads to higher share prices. There's debate about whether a stock repurchase is the best use of a company's spare cash, however.