If you are wondering what is buyback of shares, it is the process wherein a corporation rebuys its own shares from its shareholders. This way, the company that had earlier issued shares pays some of its shareholders and absorbs that part of ownership which several investors had before.
A company can do so for a variety of reasons. Some of them could be a consolidation of ownership, boosting the finances of the company or undervaluation.
- When a company buys back shares, the process may make it look more healthy thereby drawing investors.
- For many companies, the answer to the question of what does share buyback mean is that it avoids any chances of acquisitions or takeovers by another party.
- Some companies opt to buy back shares so that the value of their equity goes back.
- Many companies offer stock options to their employees. Such companies opt for buyback of shares so as to ensure that a certain level of outstanding shares is maintained.
DIvidends: Implications due to buyback
Payments of dividends often don’t ensure great flexibility for the company. Dividends need to be paid on specific dates and all common shareholders would need to be paid. However, when a company buys back shares, it ensures greater flexibility. Dividends need to be distributed to every shareholder but when there’s a buyback, the dividend can be paid only for the shareholders who opt for it. Also, dividends would mean companies have to pay dividend distribution tax or DDT. For investors too, if income from dividends crosses Rs 10 lakh, they would have to shell out extra tax.
When there is a buyback, tax rate is based on the duration for which the security is held.If shareholders were to give up their shares for buyback after holding them for a year, they would have to pay 10 per cent taxes on their income. If the sale is made under a year of holding the shares, short term capital gains of 15 per cent come into play.
Now that you are aware of the buyback of shares definition, it’s time to consider what does share buyback mean for investors and shareholders.
The buyback of shares definition gives you a fair idea of what it means to companies but it is also an attractive proposition for investors. Here’s how: when a company buys back its share, the number of outstanding shares comes down and the earnings per share or EPS goes up. If a shareholder doesn’t sell their ownership of shares, it means they now have a larger percentage of ownership of the company’s shares, and a resultant higher EPS.
For those who decide to sell their shares, the buyback means they get to sell at a price that is agreeable to them.
Another answer to what does share buyback mean for investors is that it signals that the company has access to excess cash. It means the company does not have any problems pertaining to cash flows and the investors feel secure in the knowledge that the company has used that cash to reimburse its shareholders instead of investing in other assets.
Factors to keep in mind when you think of acceding to a buyback:
- The price of the buyback is important. As a shareholder, you would need to know the exact price at which your shares will be bought back by the company. This determines if the offer is beneficial to you or not.
- The premium is another factor, defined as the difference between the price and the price of buyback and the price of the company’s share at the date of the offer. If the premium offer is higher than the value of the company’s stock you own or its potential, then you can sell your shares.
- The size of the buyback offer is also significant as it indicates the money that the company is willing to shell out for the shareholders and the health of the company.
- Keeping track of the many dates in the buyback process, from the date of approval, announcement, opening, closing to the verification of the tender form and settlement of bids are significant.
Apart from tracking all these factors, it is important that a shareholder looks at the company’s track record, its profitability, leadership and vision, apart from its growth path and take a call based on comprehensive research.
To sum up, the answer to what is buyback of shares is this: companies opt to repurchase a portion of the shares from their existing shareholders for a variety of reasons. These include consolidating their ownership, boosting confidence of investors, and boosting price of stock among others.