A share buyback happens when a company offers to buy back its own shares from investors. Companies may do this for a number of reasons. These could include changing the financing structure, signaling to the market that shares are undervalued, or to make use of cash on hand. Shareholders should consider the reasoning behind a share buyback when deciding whether to take part.
How does a share buy-back work?
When a company conducts a share buyback it will offer shareholders the opportunity to sell some or all of their shares back to the company. Once the company has bought back the shares, it cancels them, reducing the number of shares on issue.
All other things being equal, this should increase earnings per share. When the number of shares on issue is reduced, overall earnings are split between fewer shares, increasing the proportion of earnings attributable to each share. Increased earnings per share can help boost the share price of a company.
Different types of share buyback
There are various types of buybacks that companies can conduct. These include:
- Equal access buybacks: where all shareholders are offered the chance to sell their shares back to the company in proportion to their shareholding.
- Selective buybacks: where a company plans to buy back the shares of only a selection of departing shareholders.
- Employee share scheme buybacks: where a company buys back shares held by employees or directors under an employee share scheme.
- On-market buyback: where a listed company buys its own shares on a stock exchange in the ordinary course of trading.
- Minimum holding buyback: where a listed company buys back shares that could not otherwise be sold because they are below the marketable parcel value of the stock exchange.
Each type of buyback follows a different process. Different rules also apply depending on whether a company is buying back more or less than 10% of its total shares over a 12-month period.
Are share buybacks a good sign?
Returning cash to shareholders via a share buyback is generally considered to be a positive sign, provided the mechanism is not used to artificially prop up the share price. A buyback returns cash to shareholders and can potentially help increase the share price. This is a positive for investors who retain shares. On the other hand, giving money back to shareholders means it cannot be used to invest in new business opportunities which may help grow the company. Shareholders should take the time to understand the reason why a company is undertaking a share buyback when deciding whether to participate.
Latest ASX buybacks: click here.