share repurchase

(noun)

Stock repurchase (or share buyback) is the reacquisition by a company of its own stock. In some countries, including the U.S. and the UK, a corporation can repurchase its own stock by distributing cash to existing shareholders in exchange for a fraction of the company's outstanding equity; that is, cash is exchanged for a reduction in the number of shares outstanding. The company either retires the repurchased shares or keeps them as treasury stock, available for re-issuance.

Examples of share repurchase in the following topics:

  • Drawbacks of Repurchasing Shares

    • Share repurchases often give an advantage to insiders and can be used to manipulate financial metrics.
    • There are a number of drawbacks to share repurchases.
    • Both shareholders and the companies that are repurchasing the shares can be negatively affected.
    • Furthermore, share repurchases can be used to manipulate financial metrics.
    • All financial ratios that include the number of shares outstanding (notably earnings per share, or EPS) will be affected by share repurchases.

  • Repurchasing Shares

    • An alternative to cash dividends is share repurchases.
    • In a share repurchase, the issuing company purchases its own publicly traded shares, thus reducing the number of shares outstanding.
    • When a company repurchases its own shares, it reduces the number of shares held by the public.
    • If the company has put rights on its shares, it may use them to repurchase shares at that price.
    • The company repurchases shares from all shareholders who stated a price at or below that repurchase price .

  • Benefits of Repurchasing Shares

    • Share repurchases are beneficial when the stock is undervalued, management needs to meet a financial metric, or there is a takeover threat.
    • A company may seek to repurchase some of its outstanding shares for a number of reasons.
    • Repurchasing shares may also be a signal that the manager feels that the company's shares are undervalued.
    • To do this, the takeover target will repurchase its own shares from the unfriendly bidder, usually at a price well above market value.
    • Share repurchases are one way of lowering the amount of cash on the balance sheet.

  • Reporting Stockholders' Equity

    • Equity (beginning of year) + net income − dividends +/− gain/loss from changes to the number of shares outstanding = Equity (end of year).
    • Share repurchases, in which a firm gives back money to its investors, reducing its financial assets, and the liability of shareholders' equity.
    • For practical purposes (except for its tax consequences), share repurchasing is similar to a dividend payment, as both consist of the firm giving money back to investors.
    • Rather than giving money to all shareholders immediately in the form of a dividend payment, a share repurchase reduces the number of shares, thereby increasing the percent of future income and distributions garnered by each remaining share.
    • The market value of shares in the stock market does not correspond to the equity per share calculated in the accounting statements.

  • Repurchasing Stock

    • The company either retires the repurchased shares or keeps them as treasury stock, available for re-issuance.
    • In an efficient market, the net effect of a stock repurchase does not change the value of each share.
    • So, the net effect of the repurchase would be zero.
    • In an inefficient market that has underpriced a company's stock, a repurchase of shares can benefit current shareholders by providing support to the stock price.
    • Consider a company that repurchases 15,000 shares of its $1 par value stock for $25 per share.

  • Dividends Payable

    • There are two ways to distribute cash to shareholders: share repurchases (reported as treasury stock in the owner's equity section of the balance sheet) or dividends.
    • A dividend is allocated as a fixed amount per share.
    • Therefore, a shareholder receives a dividend in proportion to the shares he owns -- for example, if shareholder Y owns 100 shares when company Z declares a dividend of USD 1.00 per share. then shareholder Y will receive a dividend of USD 100 for his shares.
    • The per share dividend amount is multiplied by the number of shares outstanding and this result is debited to retained earnings and credited to dividends payable.

  • Stock Dividends

    • Instead of each shareholder receiving, say $2 for each share, they may receive an additional share.
    • The total number of shares outstanding increases in proportion to the change in the number of shares held by each shareholder.
    • As the number of shares outstanding increases, the price per share drops because the market capitalization does not change.
    • A stock split is paid by switching out old shares for a greater number of new shares.
    • The company may have gotten these shares from share repurchases, or simply from them not being sold when issued.

  • Types of Stock Market Transactions

    • Types of stock market transactions include IPO, secondary market offerings, secondary markets, private placement, and stock repurchase.
    • Stock repurchase (or share buyback) is the reacquisition by a company of its own stock.
    • In some countries, including the U.S. and the UK, a corporation can repurchase its own stock by distributing cash to existing shareholders in exchange for a fraction of the company's outstanding equity; that is, cash is exchanged for a reduction in the number of shares outstanding.
    • The company either retires the repurchased shares or keeps them as treasury stock, available for re-issuance.
    • Firstly, some part of profits can be distributed to shareholders in the form of dividends or stock repurchases.

  • Long-Term Relationships: Satisfaction and Loyalty

    • Brand loyalty in marketing consists of a consumer's commitment to repurchase or otherwise continue using the brand and can be demonstrated by repeated buying of a product or service, or other positive behaviors, such as word of mouth advocacy.
    • Brand loyalty is more than simple repurchasing, however.
    • Customers may repurchase a brand due to situational constraints (such as vendor lock in), a lack of viable alternatives, or out of convenience.
    • Such loyalty is referred to as "spurious loyalty. " True brand loyalty exists when customers have a high relative attitude toward the brand which is then exhibited through repurchase behavior.
    • Although sales or market share can indicate how well a firm is performing currently, satisfaction is perhaps the best indicator of how likely it is that the firm's customers will make further purchases in the future.

  • Brand Loyalty

    • In marketing, brand loyalty refers to a consumer's commitment to repurchase or otherwise continue using a particular brand by repeatedly buying a product or service.
    • Aside from a consumer's ability to repurchase a brand, true brand loyalty exists when a. ) the customer is committed to the brand, and b. ) the customers have a high relative attitude toward the brand, which is then exhibited through repurchase behavior.
    • Thus, "brand penetration" or "brand share" reflects only a statistical chance that the majority of customers will buy that brand next time as part of a portfolio of brands.