Everything you need to know about stock buybacks.
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Why might a company buy back its stock?
- To stop stock options given to executives from diluting the stock.
- The management believes the stock is low.
- To prevent a hostile takeover. If the company owns a high percentage of the shares, then it is more difficult for another company to buy a majority of their stock. This occurs if the company keeps the stock as treasury stock instead of eliminating it. A company can only keep 10% of the total shares as treasury stock and those shares have no voting rights.
- To boost confidence in the company's stock. Buying your own stock is telling the rest of the world that you believe in your future prospects.
- The company has a lot of cash and wants to invest back in the company, but is unable to use the money to expand their operations.
What are the benefits of stock buybacks?
- If they destroy the shares, it decreases the number of total shares outstanding, thus increasing the company's EPS.
- The increased buying can raise the stock price.
- It shows the executives' confidence in the future prospects of the company and that they think the stock is undervalued.
Why might a buyback be bad?
- The shares could be bought with debt.
- It could show that the management can't invest the money to better their revenues.
- It might be a PR stunt to try to artificially better the image of their stock.