how share repurchases work
share repurchases take place when companies decide to buy back their stock companies that repurchase their stock from the open market or directly from investors also known as a share buyback it is commonly done to achieve 1because a share repurchase reduces the number of shares outstanding it increases earnings per share eps a higher eps elevates the market value of the remaining shares 2 after repurchase the shares are canceled or held as treasury shares so they are no longer held publicly and are not outstanding a share repurchase impacts a company s financial statements in various ways a share repurchase reduces a company s available cash which is then reflected on the balance sheet as a reduction by the amount the company spent on the buyback at the same time the share repurchase reduces shareholders equity by the same amount on the liabilities side of the balance sheet investors interested in finding out how much a company has spent on share repurchases can find the information in their quarterly earnings reports reasons for share repurchasesa share repurchase reduces the total assets of the business so that its return on assets return on equity and other metrics improve when compared to not repurchasing shares reducing the number of shares means earnings per share eps can grow more quickly as revenue and cash flow increase if the business pays out the same amount of total money to shareholders annually in dividends and the total number of shares decreases each shareholder receives a larger annual dividend if the corporation grows its earnings and its total dividend payout decreasing the total number of shares further increases the dividend growth shareholders expect a corporation paying regular dividends to continue doing so in some cases a buyback can hide a slightly declining net income if the share repurchase reduces the shares outstanding to a greater extent than the fall in net income the eps will rise irrespective of the financial state of the business share repurchases fill the gap between excess capital and dividends so that the business returns more to shareholders without locking into a pattern for example assume the corporation wants to return 75 of its earnings to shareholders and keep its dividend payout ratio at 50 the company returns the other 25 in the form of share repurchases to complement the dividend new provisions were put into place to prevent companies from trying to boost their stock price to benefit corporate executives the inflation reduction act of 2022 which was signed by president joe biden on aug 16 2022 includes an excise tax of 1 on share buybacks of 1 million or more made after dec 31 2022 any new public or employee stock issues will not count 3advantages and disadvantages of share repurchasesa share repurchase shows the corporation believes its shares are undervalued and is an efficient method of putting money back in shareholders pockets 4the share repurchase reduces the number of existing shares making each worth a greater percentage of the corporation the stock s eps increases which means the price to earnings ratio p e will decrease assuming the stock price remains the same mathematically the value of the shares hasn t changed but the lower p e ratio could make it appear that the share price represents a better value thus making the stock more attractive to potential investors a criticism of buybacks is that they are often ill timed a company will buy back shares when it has plenty of cash or during a period of financial health for the company and the stock market the stock price of a company is likely to be high at such times and the price might drop after a buyback a drop in the stock price can imply that the company is not so healthy after all a share repurchase can also give investors the impression that the corporation does not have other profitable opportunities for growth which is an issue for growth investors looking for revenue and profit increases a corporation is not obligated to repurchase shares due to changes in the marketplace or economy repurchasing shares puts a business in a precarious situation if the economy takes a downturn or the corporation faces financial obligations that it cannot meet shows the company believes its shares are undervaluedincreases share value because it reduces number of sharesmakes stock more attractive to potential investorscan be ill timedmay lead to drop in price which means company isn t healthymarket may believe the company doesn t have growth opportunitiescan create challenges during economic downturnreal world example of a share repurchasethere are many examples of share repurchases or buybacks in the marketplace let s take a look at apple aapl according to a cnbc report the company spent more than 467 billion in share buybacks since 2012 in fact it was reportedly the biggest repurchaser of its own stock among all of the companies in the s p 500 and spent the most among some of its peers the company spent 85 5 billion to buy back its stock during the 2021 fiscal year this was in addition to the 14 5 billion it spent on dividends during the same period 5