What is the purpose of Share buy back?

Question

If a company buys its own shares does it cause the value of remaining availible shares to increase. Is this a tactic used to inflate share price

Answer 1

Because the company has no better use for the money. Yes, it often causes the value of the outstanding shares to increase. The shares which are bought-back are still in issue. The idea of this tactic being used to inflate share price is a little questionable.

The theroy is that the company invests its money in itself in expectation that the share price will increase sufficiently in the future so that when they re-sell them, the company will make a greater profit than in any of the alternatives for the cash.

It is sometimes misused to artificially inflate the share price. Watch to see if any company insiders sell their personal holdings afterwards if you are looking for manipulation.

Answer 2

It means it went from growth to a value stock. Take Microsoft. It's sitting on like $50 billion in t-bills (basically cash). Now Microsoft could use that money to buy other companies and get even bigger. Well they think they bought all the companies they need to buy right now. The second thing is they could build a factory and sell HDTVs for their X-Box for example. Well they voted that down too. Just sitting on cash also looks bad to the investor (it means the company ran out of growth). They could up the dividend or buy back shares. Microsoft had so much money, they decided to do both. When they buy back a stock, they basically destroy the stock that they buy back (so that stock no longer has voting rights or a divided for example).

The stock might briefly go up on things like special dividends, but the stock will probably go down if there is plenty of outstanding shares. The problem is that the big money and those looking for the next big thing have dumped the companies offering a buy back since they are looking for growth and not value.

Answer 3

There are a few reasons for buybacks.

1. A company knows that there will be a large number of employee stock options exercised. They may not want more shares of the firm issued, so they repurchase shares that they will give to employees when the options are exercised.

2. Tax efficient way to distribute cash to investors. Prior to the tax law change a couple of years ago, dividends were taxed at the ordinary tax rate (39.6% for wealthy investors). If a company buys back shares instead of paying dividends, then investors can choose if they want to sell their stock & only pay taxes on their profits at the long term capital gains rate -- which was 20%. The tax law change has had an effect. Many companies that used to do large buy-backs (like Microsoft) have instead paid large dividends.

3. Companies buy back shares in order to signal their quality. The theory (Stew Myers' "Pecking Order Theory" for raising & dispersing cash) says that companies can signal private information by buying or selling their shares. If you ever see a company selling shares to raise cash when they have access to the debt markets, you have to ask yourself "Would they be selling new shares if they thought their shares were underpriced?" The answer is No!. So -- if you see a company buying back shares, you have to assume the opposite. They would only buy back shares if they knew that their shares were underpriced.

Answer 4

A company buys back shares to illustrate the company's belief that the company thinks it's stock is undervalued.

Share buy backs are considered a positive signal to investors, normally causing the stock price to go up. It's like insider purchases as opposed to insider sellers. It says the company is confident about the future. When Microsoft announced a $40 billion buyback the stock shot up. This increased the value of the shares because now those who want to buy the shares have to pay more because there are less shares left to buy.

As a matter of fact, "Standard & Poor's 500 companies snapped up a record $349 billion of their own shares in buybacks last year." *

Source(s):
http://www.usatoday.com/money/markets/us... *
www.quicken.com

Answer 5

Hell yes, you are right...it's a scheme to support a companys stock price and an avenue for the insiders to sell their stock! In case you've checked them out in detail, you'll find that many of them even borrow the money(financed buybacks)to buy the stock

This, the ultimate lipstick on the pig.

Answer 6

It is a show of confidence in a company's stock by that company.