Accounting: Quick Fix
How will a buyback of shares provide a “quick fix” for EPS (earning per share)?
A buyback allows companies to invest in themselves. By reducing the number of shares outstanding on the market, buybacks increase the proportion of shares a company owns. Buybacks can be carried out in two ways:
1. Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them.
2. Companies buy back shares on the open market over an extended period of time.
The typical advantage of a share buyback is that it increases earnings per share (EPS) since there are a fewer number of shares. The theory being that since EPS goes up, the stock price should as well. A buyback is also management’s way of telling the world that it believes that its stock is under-valued. It sends a signal that the company considers its shares undervalued, and it finds a use for some of that vast cash hoard many firms have. Companies could, of course, pay a dividend, but many prefer the flexibility of buybacks because they are occasional events (the issuance of a dividend usually creates an expectation of regular payouts) (Meyers, 2006).
1. A company that is buying back its own stock usually believes the stock is undervalued and believes it is a good buy. This is obviously a good sign for shareholders because the company is basically betting on their continued success.
2. Stock buybacks create a very nice price support level for investors. This is especially true in recessionary periods or bear market periods. A stock that has a massive stock repurchase program going on will have that extra price support that can serve as a safety net for investors in the stock.
3. Buying back stock means less outstanding shares, which means higher earnings per share number if all other
A buyback allows companies to invest in themselves. By reducing the number of shares outstanding on the market, buybacks increase the proportion of shares a company owns. Buybacks can be carried out in two ways:
1. Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them.
2. Companies buy back shares on the open market over an extended period of time.
The typical advantage of a share buyback is that it increases earnings per share (EPS) since there are a fewer number of shares. The theory being that since EPS goes up, the stock price should as well. A buyback is also management’s way of telling the world that it believes that its stock is under-valued. It sends a signal that the company considers its shares undervalued, and it finds a use for some of that vast cash hoard many firms have. Companies could, of course, pay a dividend, but many prefer the flexibility of buybacks because they are occasional events (the issuance of a dividend usually creates an expectation of regular payouts) (Meyers, 2006).
1. A company that is buying back its own stock usually believes the stock is undervalued and believes it is a good buy. This is obviously a good sign for shareholders because the company is basically betting on their continued success.
2. Stock buybacks create a very nice price support level for investors. This is especially true in recessionary periods or bear market periods. A stock that has a massive stock repurchase program going on will have that extra price support that can serve as a safety net for investors in the stock.
3. Buying back stock means less outstanding shares, which means higher earnings per share number if all other
Cited: The CPA in Industry: Corporate Share Buybacks. (2007). The CPA Journal. Retrieved on Dec 12, 2009 from http://jobfunctions.bnet.com/abstract.aspx?docid=58545. Kennon, J. (2007). About.com. Retrieved on Dec 12, 2009 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/share-repurchase-programs.htm#. Myers, R. (2006). Can you have your stock and sell it, too?. CFO Magazine. Retrieved on Dec 12, 2009 from http://www.cfo.com/article.cfm/8099425/c_2984290/?f=archives. Smith, A. (2009). Stock buybacks, the pros and cons examined. Stock Trading to Go. Retrieved on Dec 12, 2009 from http://www.stocktradingtogo.com/2009/05/22/stock-buybacks-share-repurchase-investing-pros-cons/. Taub, S. (2008). SEC extends buyback safe haven. CFO.com. Retrieved on Dec 12, 2009 from http://www.cfo.com/article.cfm/12366023/c_12339441.