what is a buyback 
a buyback is a company s purchase of its outstanding stock shares buybacks reduce the number of shares available on the open market companies usually buy back shares of their stock to increase the value of the remaining shares by reducing the supply of them they may also buy back shares to prevent a major shareholder from taking a controlling stake in the company investopedia yurle villegasunderstanding buybacksbuybacks are also known as share repurchases they allow companies to invest in themselves reducing the number of shares outstanding on the market increases the proportion of shares owned by investors a company may launch a buyback because it believes its shares are undervalued and to provide investors with a better return it increases the proportion of earnings that each share is worth this stock price will rise if the same price to earnings p e ratio is maintained 1by reducing the number of existing shares each share is worth a greater percentage of the corporation the stock s earnings per share eps thus increases while the p e ratio decreases or the stock price increases 2a share repurchase demonstrates to investors that the business has sufficient cash set aside for emergencies and a low probability of economic troubles companies usually give their employees and executives stock rewards and stock options as part of their compensation a company can buy back shares and issue them to employees and management this strategy helps avoid the dilution of existing shareholders 3the practice is not without controversy congress attempted to address the issue with the stock buyback reform and worker dividend act of 2019 but the bill never made it past the senate 4because share buybacks are carried out using a firm s retained earnings the net economic effect to investors would be the same as if those retained earnings were paid out as shareholder dividends tax considerations aside the buyback processbuybacks are carried out in two ways a company may fund its buyback by taking on debt with cash on hand or with its cash flow from operations 7an expanded share buyback is an increase in a company s existing share repurchase plan an expanded share buyback accelerates a company s share repurchase plan to achieve a faster contraction of its share float the market impact of an expanded share buyback depends on its magnitude a large expanded buyback is likely to cause the share price to rise the buyback ratio considers the buyback dollars spent over the past year divided by its market capitalization at the beginning of the buyback period 8 the buyback ratio enables a comparison of the potential impact of repurchases across different companies it is also a good indicator of a company s ability to return value to its shareholders since companies that engage in regular buybacks have historically outperformed the broad market criticism of buybacksnot all investors applaud a company s stock buyback a share buyback can give investors the impression that the corporation has failed to identify profitable new opportunities which is an issue for growth investors looking for increases in revenue and profit repurchasing shares puts a business in a precarious situation if the economy takes a downturn or the corporation faces financial issues right after spending its cash reserves others allege that buybacks can be used to inflate a company s share price artificially in the market possibly to produce higher executive bonuses 9as part of the inflation reduction act of 2022 certain stock buybacks for domestic public companies will incur a 1 excise tax making them more expensive for corporations this applies to buybacks after dec 31 2022 10expenditure on buybacks by s p 500 companies in 2023 that s a drop from the 922 7 billion companies spent in 2022 11advantages and disadvantages of buybackscompanies can attract new investors after a share buyback that s because buybacks often boost the stock s eps which reduces its p e ratio if the stock price stays the same new investors may believe the share price is a better value completing a share buyback allows companies to reward shareholders by putting money back in their pockets this is especially true for businesses that believe their shares are undervalued in the market buybacks involve spending capital this may leave investors wondering why the company isn t using its money to grow the business it can leave the impression that the business isn t making the best use of its capital companies should be cautious about doing buybacks because it can cause higher stock prices to drop a price drop may indicate problems within the company even if a buyback is underway share value may increase and attract new investorsputs money back into shareholders pocketsmay lead to increase in share pricesome investors prefer to see cash spent on growthmay lead to drop in share priceexample of a buybacka company s stock price has underperformed its competitor s stock even though it has had a solid year financially to reward investors and provide a return to them the company announces a share buyback program to repurchase 10 of its outstanding shares at the current market price the company had 1 million in earnings and one million outstanding shares before the buyback equating to eps of 1 trading at a 20 per share stock price its p e ratio is 20 with all else being equal 100 000 shares would be repurchased and the new eps would be 1 11 or 1 million in earnings spread out over 900 000 shares to keep the same p e ratio of 20 shares would need to trade up 11 to 22 22 