4 Reasons Why Companies Buyback Their Shares?

4 Reasons Why Companies Buyback Their Shares?

Buyback of shares is the company action where a company offers to repurchase its shares from the existing shareholders. The company may have to buy back its shares for a higher price than the market price through the open market or the tender offer route.

Why do companies buy back their shares?

There are several reasons why a company may want to purchase back shares.

Firstly, the main reason to buy back the company shares is to change its capital structure. Because the amount of shares trading in the secondary market affects several things like the earnings per share (EPS), the company’s ratio of debt to equity, etc. For instance, reducing the number of outstanding shares on the market helps increase the EPS, so the company is considered more profitable.

Secondly, the number of outstanding shares also influences the stock price. A decrease in stock numbers would boost the value of the stock because of the fewer supply.

Finally, the company may become a majority shareholder. It can gain a majority shareholder status by owning more than 50% of the company’s shares. A majority shareholder can hold a significant position in the voting and direction of the company.

Sometimes, companies buy back shares when they have extra cash on their hand, and they see an upward increase in the stock market.

After buying back its shares, the company can do several things with those repurchased stocks.

  1. When the company thinks that its shares are traded too low at present, it may repurchase its shares to reissue its stocks later. In this scenario, the company does not cancel shares, but it sells them again later under the same stock number as they had before.
  2. The company may give or sell the shares to employees as employee compensation or stock sale. The employees gain the right to sell or transfer the option. This method motivates employees to stay with the company for a longer time.
  3. Lastly, the company can retire or nullify the shares. The company can not resissue these shares and they have no financial value any more. After the retirement of stocks, they become unable to be reissued. Usually companies highlight this kind of retired stock with the word “canceled.”

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