What is buyback?
A buyback is an event where a company buys its own shares from their shareholders. It essentially allows companies to re-allocate resources and compose a more efficient capital structure. Buybacks can also be used to increase the value of the remaining outstanding shares by reducing share count, which in turn increases earnings per share (EPS).
Why do companies buyback shares?
Companies may buy back shares for many reasons, like increasing shareholder return, repurchasing undervalued stock, utilizing excess cash flow, and improving financial metrics such as EPS and Return on Equity (ROE). Additionally, buybacks can help reduce excess corporate debt or even pursue mergers and acquisitions.
Benefits and Risk associated with Buyback of Shares
There are both benefits and risks associated with stock buybacks. On one hand it reduces a company’s number of assets on their balance sheet which in turn could make them less vulnerable in a downturned economy. On the other hand, companies have been known to repurchase large portions of their own stocks at prices that may be too high when compared to their intrinsic value; this would essentially result in money being wasted by overpaying for the same asset.