Why companies do stock buybacks?

[Secure Da Bag]

For those who were wondering,
Breaking Down Stock Buybacks

There are several ways in which a company can return wealth to its shareholders. Although stock price appreciation and dividends are the two most common ways, there are other ways for companies to share their wealth with investors. In this article, we will look at one of those overlooked methods: share buybacks or repurchases. We'll go through the mechanics of a share buyback and what it means for investors.


Key Takeaways

• A stock buyback occurs when a company buys back its shares from the marketplace.
• The effect of a buyback is to reduce the number of outstanding shares on the market, which increases the ownership stake of the stakeholders.
• A company might buyback shares because it believes the market has discounted its shares too steeply, to invest in itself, or to improve its financial ratios.

What Is a Stock Buyback?
A stock buyback, also known as a share repurchase, occurs when a company buys back its shares from the marketplace with its accumulated cash. A stock buyback is a way for a company to re-invest in itself. The repurchased shares are absorbed by the company, and the number of outstanding shares on the market is reduced. Because there are fewer shares on the market, the relative ownership stake of each investor increases.

....

The Motives
Why do companies buy back shares? A firm's management is likely to say that a buyback is the best use of capital at that particular time. After all, the goal of a firm's management is to maximize return for shareholders, and a buyback typically increases shareholder value. The prototypical line in a buyback press release is "we don't see any better investment than in ourselves." Although this can sometimes be the case, this statement is not always true.

There are other sound motives that drive companies to repurchase shares. For example, management may feel the market has discounted its share price too steeply.2 A stock price can be pummeled by the market for many reasons such as weaker-than-expected earnings results, an accounting scandal, or just a poor overall economic climate. Thus, when a company spends millions of dollars buying up its own shares, it can be a sign that management believes that the market has gone too far in discounting the shares—a positive sign.

Improving Financial Ratios
Another reason a company might pursue a buyback is solely to improve its financial ratios—the metrics used by investors to analyze a company's value. This motivation is questionable. If reducing the number of shares is a strategy to make the financial ratios look better and not to create more value for shareholders, there could be a problem with management. However, if a company's motive for initiating a buyback is sound, better financial ratios as a result could simply be a byproduct of a good corporate decision. Let's look at how this happens.

First, share buybacks reduce the number of shares outstanding. Once a company purchases its shares, it often cancels them or keeps them as treasury shares and reduces the number of shares outstanding in the process.

Moreover, buybacks reduce the assets on the balance sheet, in this case, cash. As a result, return on assets (ROA) increases because assets are reduced; return on equity (ROE) increases because there is less outstanding equity.3 In general, the market views higher ROA and ROE as positives.

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[Warren Moon]

the most popular senator in the best tax saving haven state (Delaware) for corporations just called for this. fukking huge. He has the relationships both nationally and locally to get it done

 

[FAH1223]

Companies buying back their own stock and now laying off workers or furloughing them is so disgusting

 

[Secure Da Bag]

I wonder if this is enough to make stock buybacks less value-intrisinic. And pushes more investors to consider employee benefits as a better reason to increase a company's valuation.

 

[943oh5]

I wonder if this is enough to make stock buybacks less value-intrisinic. And pushes more investors to consider employee benefits as a better reason to increase a company's valuation.

Ive noticed the proxy watchdog organizations are starting to care enough about this and other ESG issues to push institutional investors to start voting against directors and proposals, but I don’t think itll move the needle as long as shareholder value is the metric by which companies measure success.

 

[Mook]

I wonder if this is enough to make stock buybacks less value-intrisinic. And pushes more investors to consider employee benefits as a better reason to increase a company's valuation.

Buybacks is a scam that used to be illegal until Reagan. Lol at consider employers benefits. Y'all will say anything

 

[Mook]

I wonder if this is enough to make stock buybacks less value-intrisinic. And pushes more investors to consider employee benefits as a better reason to increase a company's valuation.

Buybacks is a scam that used to be illegal until Reagan. Lol at consider employers benefits. Y'all will say anything

 

[Warren Moon]

Companies buying back their own stock and now laying off workers or furloughing them is so disgusting

Bernie will fix it

 

[Domingo Halliburton]

the most popular senator in the best tax saving haven state (Delaware) for corporations just called for this. fukking huge. He has the relationships both nationally and locally to get it done

Was this ironic? I can't tell

 

[Warren Moon]

Was this ironic? I can't tell

Biden’s the only candidate who doesn’t own stocks. He also hasn’t sold out his public seat for a book deal. Unlike Bernie who has done both

 

[Domingo Halliburton]

Biden’s the only candidate who doesn’t own stocks. He also hasn’t sold out his public seat for a book deal. Unlike Bernie who has done both

He just gets his money from ukraine

And you're severely mistaken on that book deal thing

 

[Secure Da Bag]

Buybacks is a scam that used to be illegal until Reagan. Lol at consider employers benefits. Y'all will say anything

There was a time when employee benefits was a thing in this country.

Hopefully this recession pushes us back in that direction.

 

[GnauzBookOfRhymes]

To secure the bag of course

 

[Robbie3000]

Biden’s the only candidate who doesn’t own stocks. He also hasn’t sold out his public seat for a book deal. Unlike Bernie who has done both

Then he is dumber than he looks if he hasn't made any money the way he for industry.


Oh, and something, something Burisma.

 

[Warren Moon]

Then he is dumber than he looks if he hasn't made any money the way he for industry.


Oh, and something, something Burisma.

some ppl actually want to be uncorrupted public servants.