Shares-Stock Buybacks

Stock price appreciation and dividends are the two most common ways of in which a company can return wealth to its shareholders. There are other useful methods for companies to share their wealth with investors and one of those methods is Share buybacks. 
The Meaning of Buybacks

A stock buyback, also known as a "share repurchase", is a company's buying back its shares from the marketplace. You can think of a buyback as a company investing in itself, or using its cash to buy its own shares. The idea is simple: because a company can't act as its own shareholder, repurchased shares are absorbed by the company, and the number of outstanding shares on the market is reduced. When this happens, the relative ownership stake of each investor increases because there are fewer
shares, or claims, on the earnings of the company. 

Typically, buybacks are carried out in one of two ways: 

Tender Offer Shareholders may be presented with a tender offer by the company to submit, or tender, a portion or all of their shares within a certain time frame. The tender offer will stipulate both the number of shares the company is looking to repurchase and the price range they are willing to pay (almost always at a premium to the market price). When investors take up the offer, they will state the number of shares they want to tender along with the price they are willing to accept. Once the company has received all of the offers, it will find the right mix to buy the shares at the lowest cost. 

Open Market The second alternative a company has is to buy shares on the open market, just like an individual investor would, at the market price. It is important to note, however, that when a company announces a buyback it is usually perceived by the market as a positive thing, which often causes the share price to shoot up. 

The Motives of buyback
  • A buyback is the best use of capital at a particular time and a buyback generally increases shareholder value. 
  • Another reason a company might pursue a buyback is solely to improve its financial ratios.Share buybacks reduce the number of shares outstanding. Once a company purchases its shares, it often cancels them or keeps them as treasury shares and reduces the number of shares outstanding, in the process. 
  • The buyback also helps to improve the company's price-earnings ratio (P/E). The P/E ratio is one of the most well-known and often-used measures of value. In other words, fewer shares + same earnings = higher EPS! 

The Rationale 

Whether share buybacks are good?  If a stock is undervalued and a buyback truly represents the best possible investment for a company, the buyback - and its effects - can be viewed as a positive sign for shareholders.