What is share repurchase?
Key Points
Share repurchase refers to listed companies using cash and other methods to buy back some of the shares issued by their own company.
The most common repurchase methods are two: one is to repurchase directly on the open market, and the other is to conduct a tender offer to the market.
The main purposes of share repurchases are to increase stock prices when undervalued, resolve crisis situations of hostile takeovers and mergers, provide better returns to shareholders, and optimize capital structure.
If the timing and price are right, share repurchases may boost stock prices. However, everything is not absolute and needs to be viewed dialectically.
Concept Explanation
We often see the term 'share buyback' in financial news. What does this mean? It refers to listed companies using cash and other methods to buy back some of the shares they have already issued.
There are many ways to buy back shares, the most common being two. Most buybacks are directly conducted on the open market. Some use a tender offer approach, offering to the market at a pre-determined price or price range, with set quantity and duration. If the number of shares tendered is excessive, it is purchased proportionally, if too few, the price or duration is adjusted.
After the shares are repurchased, they may be directly cancelled or held for future use (e.g. for employee benefits).
Purpose of Buyback
For what purposes do listed companies buy back shares? The following situations are more common.
① If a company believes its stock price is severely undervalued and aims to boost the price, it may consider share buybacks. According to Warren Buffett's 2020 shareholder letter, Berkshire Hathaway may only repurchase shares when 'Charlie Munger and Buffett believe the stock is undervalued.'
② If there are signs of hostile takeovers or mergers in the market, a company may resort to share buybacks to fend off the threat. For example, Exxon Mobil's buybacks in 1989 and 1994 fall into this category.
③ Share buybacks by companies may also aim to provide better returns to shareholders. By reducing the number of publicly held shares, the earnings per share may increase when profits remain constant; and with the total annual dividend amount unchanged, individual shareholders may receive more dividends.
④ Buying back shares may also be to optimize capital structure and create more value. Some financially strong and stable-growing companies may repurchase stocks by issuing debt to increase financial leverage and improve certain financial metrics.
Market Impact
If the timing and price of the buyback are right, it often sends positive signals to the market, indicating that the company believes the stock is undervalued and bullish about the future, or showing that the company's management cares about the interests of shareholders, or indicating that the company is reclaiming its control, which may lead to a rise in the stock price.
Applied Materials (AMAT) announced a $7.5 billion share buyback plan on March 22, 2021. In the following 9 trading days, the company's stock price increased by approximately 20%.
However, nothing is absolute. Even with buybacks signaling positivity, stock prices may still fall.
Moreover, if a company has major negative news, unhealthy financial conditions, inability to expand, or intentions to manipulate stock prices, the results of a buyback may be even worse.
In the first half of 2018, McDonald's, Bank of America, JPMorgan, and other companies spent tens of billions of dollars to buy back stocks. However, this did not prompt a recovery signal in their stock prices during that period.
Therefore, a balanced perspective is needed. When facing share buybacks, it is important to make decisions based on rational analysis.
