When any company declares a stock purchase or buyback, then it’s the time to take the deeper look and analyze that what’s behind this action.
Buyback or repurchase can work for buyers in multiple ways.
It can give an offer to current stockholders to purchase up the certain amount of shares at fixed price. (Usually lower than market price). But this must be a limited time offer.
There are some other ways like you can buy shares from the open market. Most of the companies do not use this process but when the stock price is extra ordinary low, companies get the shares from the open market.
These were the two common ways. But a question is still unanswered that why a company would wants to buy its own shares back?
Reasons for stock repurchases:
There are a number of reasons that a company wants to repurchase its own shares. Few companies do this to give benefit to the stockholders and other companies do this for philanthropic purposes.
1- If any company is having a large amount of capital in the form of cash, in such situations, it can decide to invest this money. One of various options is to issue the portion of it to the shareholders. Company has options to do this in two ways. Like by buying the outstanding shares or as dividends. Stock holders remains in beneficial position even if they are not selling their shares by the depression in the outstanding shares.
2- If the stock of the company is going through the depressing financial conditions, then buying back of the stocks can give a temporary boost to the company and its financial status. EPS (earning per share) and PE (price earnings ratio) get improved even though the earning of the company remains the same. This is because these terms are dependent on the quantity of outstanding stocks of a company in the market. Smaller the number, greater will be the ratios. It means that the business model remains the same, but only the metrics are changed.
3- The value of share is increased by buying back the shares as it decreases the dilution of the stocks. If a company has left its excessive stocks in the market, their value is decreased.
4- There are companies who chose to buy back their shares from the open market as they need to protect their company from any raider company who wants to take over it by buying the company’s stocks. To save a company from such unfriendly companies, it is the easiest option to buy up your shares from the open market.
In the end it can be concluded that stock repurchases can be very much beneficial for share holders. The reasons behind this are many such as it is the best utilization of extra cash and the stocks’ prices are minimal in such situations. But it is important to consider if the buy back is really beneficial for you or is just for improving the financial ratios of the company.