Buybacks
Buybacks refer to a company repurchasing its own shares from the open market, effectively reducing the number of outstanding shares. This can lead to an increase in the value of the remaining shares and can be seen as a way for a company to return value to its shareholders. Buybacks are often used as a means of deploying excess cash or improving financial ratios.
5 Key excerpts on "Buybacks"
- Juan Ramirez(Author)
- 2011(Publication Date)
- Wiley(Publisher)
...10 Share Buybacks and Other Transactions on Treasury Shares Corporate and financial institutions with strong balance sheets and significant cash flows are tasked with capital-allocation decisions that require their executives to choose from an array of investment alternatives. These alternatives include the investment in their current businesses, the acquisition of other businesses and the return of capital to shareholders. The return of capital to shareholders via dividend distributions was the almost exclusive course of action in the 1970s. Another alternative is the return of capital via share repurchases. This alternative gained ground through the next two decades, and eclipsed dividend distributions during the dotcom revolution of the late 1990s and early 2000s. Share repurchases reflect a company's confidence in its long-term growth and profitability. In this chapter I will focus on share repurchases, or share Buybacks, analyzing the main strategies used by companies engaged in these programs. A company can purchase its own shares provided that it is authorized to do so by its articles of association (i.e., bylaws) and complies with certain statutory formalities. It must be authorized by the company's shareholders by an ordinary resolution. The authority commonly specifies the maximum number of shares which may be purchased, the maximum and minimum prices which may be paid and the date on which the authority will expire. Normally, shares which are purchased by the issuer are cancelled. However, a company is permitted to hold own shares, subject to its legal limit (e.g., 10% of the company's issued ordinary share capital). 10.1 OPEN MARKET REPURCHASE PROGRAMS One of the most common methods in share Buybacks is to buy shares directly on the open market. Normally, the company targets a period (e.g., 12 months) during which either a number of shares would be acquired or a total cash amount would be spent...
eBook - ePubConcise Guide to Value Investing
How to Buy Wonderful Companies at a Fair Price
- Brian McNiven(Author)
- 2012(Publication Date)
- Wiley(Publisher)
...But the auction nature of security markets often allows finely-run companies the opportunity to purchase portions of their own businesses at a price under 50 per cent of that needed to acquire the same earning power through the negotiated acquisition of another enterprise. When management publicly claims that its own shares are undervalued by the market and then goes out and buys the overpriced stock of another business in preference to its own supposedly underpriced stock, you must decide whether leaving your money with such fiscally irresponsible people is a good idea. Profitability or accretion of value can be as much about contraction as expansion. For example, imagine you have a half-share in a business that you consider to be worth $500 000, on the basis of the whole business being worth $1 million. Your partner wants out, and is happy to sell you his half-interest for $350 000. After the business has redeemed his shares, you will be the sole owner of a business worth $650 000 ($1 million less the $350 000 the business expended on the buyback): a 30 per cent improvement on the $500 000 value of your half-interest. Buybacks can also dilute economic value, particularly if their purpose is to prop up a declining share price or to reduce the dilution effect on EPS of executive options. When the buyback price exceeds the economic value of the business, residual shareholders receive a double whammy: first through reduced profitability, and secondly by depletion of cash resources or increased debt. Surplus funds that cannot be used to expand the business or reduce debt should be distributed by way of dividends or a uniform return of capital....
eBook - ePubCorporate Finance
A Practical Approach
- Michelle R. Clayman, Martin S. Fridson, George H. Troughton(Authors)
- 2012(Publication Date)
- Wiley(Publisher)
...Share price will reflect the amount of the cash payment (or shares in the case of a stock dividend or split) on the ex-date. Share repurchases, or Buybacks, most often occur in the open market. Alternatively, tender offers occur at a fixed price or at a price range through a Dutch auction. Shareholders who do not tender increase their relative position in the company. Direct negotiations with major shareholders to get them out of the company are less common because they could destroy value for remaining stockholders. Share repurchases made with excess cash have the potential to increase earnings per share, whereas share repurchases made with borrowed funds can increase, decrease, or not affect earnings per share, depending on the after-tax borrowing rate. A share repurchase is equivalent to the payment of a cash dividend of equal amount in its effect on shareholders’ wealth, all other things being equal. If the buyback market price is greater (less) than the book value, the book value will decline (increase). Announcement of a share repurchase is sometimes accompanied by positive excess returns in the market when the market price is viewed as reflecting management’s view that the stock is undervalued, and earnings per share can increase as a result of fewer shares outstanding. Initiation of regular cash dividends can also have a positive impact on share value. Management is seen as having enough confidence in the future to make a commitment to pay out cash to shareholders. In addition, some institutional, as well as individual, shareholders see regular cash dividend payments as a measure of investment quality. PROBLEMS 1. The payment of a 10% stock dividend by a company will result in an increase in that company’s: A. current ratio. B. financial leverage. C. contributed capital. 2. If a company’s common shares trade at relatively very low prices, that company would be most likely to consider the use of a: A. stock split. B. stock dividend. C. reverse stock split. 3...
eBook - ePubRunning an Effective Investor Relations Department
A Comprehensive Guide
- Steven M. Bragg(Author)
- 2010(Publication Date)
- Wiley(Publisher)
...For example, if the board authorizes the company to buy back shares whenever the market price of its stock drops to $5, then this establishes a floor of $5, below which the stock’s price is unlikely to drop. This tends to reduce the variability of the price, and may attract a group of investors who are less tolerant of risk. The key component of such a buy-back program is a long-term commitment to it, since its nonrenewal may trigger a sudden price drop that will result in some investor turnover. However, a buy-back may not have the desired effect if so many shares are withdrawn that it impacts the perception of overall liquidity. An investor may consider a major reduction in float to increase the risk of holding the stock, since it may be more difficult to maintain an orderly market in the stock. If so, this higher perceived level of risk may drive a decline in the stock price. A long-term, well funded stock buy-back program is a great source of publicity for the IRO, who can use it to continually issue press releases regarding how many shares have been repurchased, how much money is still authorized and available for additional buy-back activity, and how long the program has been running. A company can run afoul of its bank credit facilities with a stock buy-back program. Banks frequently disallow stock Buybacks as a condition for a loan or line of credit, on the grounds that the company is simply extracting cash from the bank in order to pay its investors. The wording of a credit facility usually restricts the issuance of dividends, and a stock buy-back program can be construed as the issuance of dividends. SEC CONDITIONS ON STOCK BUY-BACKS A stock buy-back program can cause a company to contravene the Securities Exchange Act of 1934. In its Section 9(a)(2), the Act states that it is illegal: To effect. . . a series of transactions in any security registered on a national securities exchange. . ...
eBook - ePubThe Best Investment Writing Volume 2
Selected writing from leading investors and authors
- Meb Faber(Author)
- 2018(Publication Date)
- Harriman House(Publisher)
...‘Buyback Derangement Syndrome’ by Clifford Asness, Todd Hazelkorn, and Scott Richardson P eople seem to forget some of the very basic lessons of financial economics when it comes to share repurchases. Over the last few years, there has been a lot of press, pundit, and political attention paid to share repurchases, the vast majority unduly critical. A common critique is that each dollar used to buy back a share is a dollar that is not spent on business activities that would otherwise stimulate economic growth. Oh, if only it were that simple. We do not believe that this harsh narrative appropriately reflects the true impact of share repurchases on the economy as a whole. In fact, the true impact of share repurchases is difficult to estimate, and any estimate requires far more nuanced analysis than has been offered. It is possible, of course, that an individual company’s repurchase decision might be in the best interest of shareholders—possibly because of management’s pessimistic assessment of investment opportunities, or possibly from reducing the agency costs that can accompany a large cash hoard. 129 In contrast, it is also possible that some repurchase decisions are suboptimally motivated by different agency issues, such as the desire to boost stock prices ahead of anticipated management options exercise. 130 Note that the preceding arguments are about how share repurchases may help or hurt shareholders. Oddly, some more extreme repurchase critics argue that share repurchases are problematic precisely because they maximize current shareholder value. According to this narrative, shareholders act myopically, rewarding share repurchases even though the repurchases ultimately rob them (and the economy as a whole) of future profitable investments. This claim is exceptionally difficult to substantiate, and those proffering it do not make any serious effort to do so...
