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What Is Share Buyback?

Views 25412022.05.06

Core points

  • Share buyback means that a listed company buys back some of the shares already issued by its own company through cash and other means.

  • There are two most common ways of repurchase, one is to buy back directly in the open market, and the other is to make an offer to the market.

  • The main purpose of share buyback is to increase the stock price when the stock price is undervalued, to resolve the crisis of hostile takeover and merger, to give shareholders a better return, to optimize the capital structure, and so on.

  • If the timing and price are right, the share buyback may drive up the stock price, but everything is not absolute and needs to be viewed dialectically.

Detailed explanation of concept

We often see the word "share buyback" in financial news. What does this mean? It means that listed companies buy back some of the shares already issued by their own companies through cash and other means.

There are many ways to buy back, the most common of which are two. Most buybacks are made directly on the open market.

Others make an offer to the market in the form of an offer with a pre-determined price or price range, buyback quantity and duration. If there are too many shares in the tender, they will be allocated in proportion, and if there are too few, the price or time will be adjusted.

After the shares are repurchased, they may be cancelled directly, or they may be reserved for future use (for example, for employee benefits).

Purpose of repurchase

For what purpose do listed companies buy back shares? The following situations are more common.

① if the company feels that the share price is seriously undervalued, it may consider buying back shares in order to raise the share price. According to Buffett's 2020 letter to shareholders, Berkshire can only buy back shares if "Charlie Munger and Buffett believe that their shares are sold for less than their value."

② if there are signs of hostile takeovers and mergers in the market, the company may also consider share buybacks to resolve the crisis. This is the case, for example, with Exxon's buybacks in 1989 and 1994.

③ may also buy back shares to give shareholders a better return. Share buybacks reduce the number of shares held by the public, so earnings per share will increase when profits remain unchanged, and dividends will increase for each shareholder when the total annual dividend remains the same.

④ 's share buyback may also be aimed at optimizing the capital structure to better create value. Some strong and stable growth companies may borrow to buy back shares, thereby increasing financial leverage and improving some of the relevant financial data.

Market impact

If the timing and price of the buyback are right, it can often send a positive signal to the market that the company feels that the stock price is undervalued and optimistic about the future, or that the management of the company cares about the interests of shareholders, or that the company is regaining its control. Share prices may rise as a result.

Applied Materials Inc (AMAT) announced a $7.5 billion share buyback program on march 22nd, 2021, and its share price has risen about 20 per cent in the nine trading days since then.

But there is no certainty, and share prices can fall even with buybacks that send positive signals.

What's more, if the company has significant negative news, is financially unhealthy, is unable to scale up, or wants to manipulate its share price, the buyback result may be even worse.

Companies such as McDonald's Corp, Bank of America Corporation and JPMorgan Chase & Co spent billions on share buybacks in the first half of 2018, but that did not make their share prices show signs of recovery during this period.

Therefore, we need to look at it dialectically, do not want to buy with a buyback, whether to buy or not depends on rational analysis.

This material is for teaching use only and is not recommended for investment.

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.

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