- Share buyback is when the company is repurchasing stocks from its holders.
- Usually, companies are doing this to increase their own capitalization.
- Big companies are preferring share buyback instead of paying dividends.
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Share buyback or share repurchase is when the company that issued the shares buys them back from the holders. Many companies practice share repurchase instead of paying dividends, such as Google1 (more precisely its parent company Alphabet), Apple and T-Mobile.
The company can both repurchase shares on the stock market and directly from the holders, it does not matter. What matters is that large companies are increasingly using stock buybacks as a way to pay shareholders instead of paying dividends. Small companies, in their turn, although technically can use stock repurchase, in practice almost never use this mechanism, usually due to lack of equity capital.
Why companies are buying their shares back?
I can describe different situations why companies may do this: the desire to reduce the number of shareholders, the desire to reduce the total cost of capital or to consolidate ownership.
In practice, however, two scenarios are possible and most common. I will call them pessimistic and optimistic.
In the optimistic scenario, when the value of the company is growing and the market is rocking, the company can buy back shares to attract more investors and sell the shares for more than they were bought back before. In fact, this allows the company to invest in its own stock.
In a pessimistic scenario, when the market is in recession and there is a market that the company’s capitalization will go down, the company can buy back shares to support the price of the remaining shares on the stock exchange. This demonstrates to investors that the company is healthy and can be invested in.
Is buying back shares risky for the company?
Not really. Yes, companies often borrow money to finance such a buyout, which can lower their credit rating. However, in a very short period everything comes back, so there is almost no risk for companies in this respect.
Is buying back shares risky for the economy?
Some experts say no. However, it’s a little more complicated than that. Share repurchase artificially maintains the price of stocks during recessions and, conversely, accelerates their value during growth. This can be problematic because it reinforces the financialization of the market, where the return on investment in the financial sector far exceeds the ROI in the real economy.
Of course it doesn’t always work that way, sometimes it holds the market in check and thus supports public welfare. So each case in shares repurchase has its own unique impact on economy, which depends on a large number of factors.
What companies are buying their stocks back?
Many companies, including Big Tech and T-Mobile, but if you’re interested in a particular company, you better Google it to be sure.