Stock Buybacks are a major highlight when you are learning about the stock market and its aspects. Profitable public companies often return excess cash to shareholders by paying dividends. But they can also reward their investors another way: stock buybacks, also known as share buybacks or share repurchase programs. Let’s learn more about this in detail in this blog
What are Stock Buybacks?
The stock buyback is a process of buying back shares of a publicly traded company’s stock on the open market using cash. This could be a company’s way of giving money back to shareholders that it doesn’t need for operations or other investments.
When a company engages in a stock buyback, it buys back shares of stock from any and all investors who wish to sell on the secondary market. There is no requirement on the part of shareholders to sell their shares back to the company, and a stock buyback is available to all holders without preference.
Public businesses that have chosen to repurchase stock usually make an announcement stating that the board of directors has approved a “repurchase authorization,” which specifies the amount of funds to be used for share buybacks, or alternatively, the quantity of shares or percentage of outstanding shares that the company hopes to repurchase.
Why do companies buy back stocks?
Creating value for shareholders is the primary motivation for firms’ buybacks of their own stock. Value in this context refers to an increasing share price.
This is how it operates: A company’s stock price increases whenever there is a demand for its shares. By increasing demand and raising the price of its stock, a company that purchases its own shares adds value for all of its shareholders.
Benefits of Stock Buybacks
There are benefits to stock buybacks even if dividend payments are probably the most popular method of giving money back to shareholders:
Increase in share price
A higher share price is the primary objective of any share repurchase scheme. The board might believe that now is a good moment to purchase the company’s shares since they are undervalued. Investors, however, can view a buyback as a sign of the management’s confidence. Think of it, what company would want to repurchase stock that it expected to lose value?
Tax effectiveness
While growing share values are not taxed at all, dividend payments are taxed as income. In the event that holders sell their shares back to the company, they may naturally be subject to capital gains taxes; however, shareholders who choose not to sell benefit from increased share value and no further taxes.
Read more: removal of tax on dividends
Better flexibility than dividends
For the duration of its existence, every company that starts a new dividend or raises an already-existing payout must continue to make payments. This is because if they cut or stop paying the dividends in the future, companies run the danger of having reduced share values and disgruntled investors. In contrast, share buybacks are far more adaptable as management tools because they are one-time events.
Read more: What are dividends
Off-set dilution
Emerging businesses could find themselves in a talent recruitment competition. When a company issues stock options to retain personnel, the options that are exercised over time increase the total number of outstanding shares of the company and dilute the number of current shareholders. One strategy to counteract this effect is buybacks.
Summing it up
Stock Buybacks can lure you in to invest more. Yes, it offers plenty of benefits. But beware. It has some downsides too like high stock prices, poor use of cash, and debt-fueled cash buybacks. Always remember that when a company wishes to lower the cost of capital, preserve stock prices, raise financial ratios, bring stock prices back to their true worth, or consolidate ownership, it will repurchase its shares. Because stock buybacks have largely replaced dividends, investors stand to gain from the practice. However, there are negative business effects associated with stock buybacks, like potential tax implications, a drop in credit score, or a decline in investor confidence.
Read more: upcoming list of buyback shares in India
Frequently asked questions about Stock Buybacks
Are stock buybacks good?
A company can benefit from a share buyback if it wishes to affect its share price in the market or if it has no need to fund expansions or other projects. Investors may or may not gain from repurchases, depending on their objectives and financial situation. But investors can win if a company buys back its shares and then reissues them at a cheaper price since they can do so at a reduced cost.
Who gets benefits from the stock buybacks?
It depends on what conditions led to the repurchase. Although the company usually gains, investors may benefit from a repurchase if a company is having trouble since they can use the money to fund a more successful venture.
Are there share buybacks in Indian Stock Market?
Yes, there are plenty of share buybacks in the Indian Stock market. One of the major upcoming ones includes that from Ajanta Pharma. Check the past and future list of stock buybacks here.
What does a buyback do?
It is basically the process of repurchasing a share and taking out the outstanding shares off the market to return the capital to the investors.
Should investors take share buyback positively or negatively?
Investors generally have a positive opinion of stock buyback schemes. Through dividends, retained earnings, and the well-liked buyback plan, a company can give investors their money back. Buybacks have the potential to increase share prices and shareholder value while also offering tax benefits.
