[boringinvestor]

Share Buyback is a good thing

Many companies try to reward their shareholders through regular share buybacks. There are several reasons why a company initiates a share buyback.

1. The company could have excess cash on its balance sheet.

2. They may not have an alternate investment option.

3. They may opt for repurchase as a confidence-building measure to check the fall in prices.

4. They might want to reduce the market cap, thereby increasing EPS strategically.

5. Company may want to lower dividend payout to shareholders, thereby resulting in lower taxes for the company.

6. They may want to get a higher return on equity (RoE), leading to higher valuations.

7. They may want to increase its undervalued stock or to prevent a hostile takeover.

Implications of a Share Buyback on an Investor-

A share repurchase reduces a company’s outstanding shares. Hence, it has a direct impact on EPS (Earnings Per Share). This happens because the net income tends to remain the same. The total number of outstanding shares reduces post repurchasing.

Secondly, share repurchase has an impact on the financial statement of a company. This leads to reducing a company’s cash holding and total assets in the balance sheet. There would also be a reduction in shareholder equity. This, in turn, improves performance metrics such as Return on Equity (RoE) and Return on Assets (RoA).

Thirdly, companies that have a lot of faith in their prospects opt for share repurchase. This, in turn, reflects later in their portfolio. Share repurchase often has a positive impact on its market reputation and its share value.

Lastly, companies that opt for share repurchase can easily enhance their EPS significantly. Companies with steady EPS are high in demand from investors as they tend to have high growth and earnings potential. It is believed that companies that repurchase shares from shareholders have a significant market presence and robust pricing power. Share repurchase helps create a positive image of the company in the market. Hence, investors are willing to pay a premium for stocks with steady EPS growth. This move in-turn results in their P/E multiple expanding over time.

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