Back buy stock
Buy back of shares is purchase of one s own shares by a company in times of falling stock prices, which is expected to arrest the sliding of the scrip prices. Usually companies with surplus cash and with no capital expenditure plans in near future would go in for buyback of shares. Companies having low promoters stake and surplus cash would prefer to buyback the shares in order to increase the promoters stake. Despite number of companies having surplus cash, most of the companies may not go for delisting following buyback of shares. It may not be a good option as companies might prefer to raise money at a later stage. Moreover, some of the shareholders might not opt for selling their shares to the company as they might feel that value of the companys share was higher than the buyback price .
PROCEDURE FOR BUYBACK
A company can buy back its own shares in any of the following manners :
From the existing shareholders on a proportionate basis through the tender offer .
From open market through book building or stock exchange .
From odd lot holders.
Listed companies are required to intimate the stock exchange of general meetings and resolutions passed thereof . As buyback can be made only after passing special resolution, information on companies proposing to buyback shares may be obtained from the stock exchanges.
WHY A COMPANY BUY ITS OWN SHARES
Companies have different motives for buying back their own shares . When employees exercise options for example earnings per share can quickly become diluted as the number of a companys shares outstanding grows.
Obviously, stock buybacks create more value in the stock, thereby giving something to the shareholder: value instead of a taxable dividend. Another obvious point is the positive image a company puts out by announcing a stock buyback. They would not buy it if it were too expensive.
GOOD NEWS AND BAD NEWS
Companies also use buybacks when they have bad news to report . Obviously, the well timed positive announcements are intended to soften the blow. The company is hopeful that the good news will outweigh the bad and therefore the price impact will be neutral to positive. The good news or bad news technique is often used, even by some of the larger corporations . It can be quite effective .
DOES IT SHOW CONFIDENCE?
Sometimes companies will boldly announce their buyback intention with the statement that the stock has investment value at the current price. But considering the price impact of all that good publicity, one wonders.
Short term speculators have a great time with stock buyback announcements. To have a price rise several percentage points in just a few days is one of their dream selections. In fact, this is good for the speculators in the short term but not necessarily helpful to investors in the long term.
SHOULD WE BE WARY TODAY?
It is always good to be wary about the stock market . Historically, companies with too much money would either expand or return some money to shareholders in the form of dividends. The problem with dividends is that they are taxed. In fact, they are taxed twice, first as corporate income and second as investor dividends. Therefore, dividends are not as popular as they once were.
Companies still like to show growth. They like to announce the opening of 200 additional retail outlets or the opening of a new plant to employ 2,000 workers. It is the kind of publicity that creates a warm feeling in the companys investors and customers.
Stock buybacks do not necessarily add significant value to a company s stock. There is less risk in buying back their own shares than in new corporate growth or at least less risk in how the actions are perceived by investors.
ONLY AN ANNOUNCEMENT
Some stock buyback announcements are just that - announcements . Following the announcement, either the buyback never occurs or fewer shares are repurchased. Possibly the company originally intended to repurchase the shares, but things change and they are later unable to do so because the economics have changed. The financing became unavailable.
Although companies are occasionally accused of trumpeting a stock buyback for the purpose of supporting or accelerating the price, in reality that practice is unusual. The large majority of stock buyback activities are sincere.
WHAT HAPPENS TO THE STOCK?
Much of the stock is effectively retired, clearing up some of the dilution problems. Other shares are used for employee retirement and stock option plans. Obviously this is a good effect if the shares have true value, but a negative effect if they are overpriced.
Stock buyback announcements have many implications. In some cases it is a positive move for the company and its shareholders, even if only temporary. It improves the earnings per share since there are often fewer shares outstanding. And a stock price will often rise after a buyback announcement, especially in a rising market. However, the price can weaken and fall if negative news follows. An understanding of the company s announcement and the current true value of the stock can help an investor decide whether to buy or sell the stock.
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