What is Stock Buyback?
A Stock Buyback occurs when a company decides to repurchase its own previously issued shares either directly in the open markets or via a tender offer.
What is the Definition of Stock Buyback?
A stock buyback, or “share repurchase,” is a corporate event wherein shares previously issued to the public and traded in the open markets are bought back by the original issuer.
Once a company repurchases a portion of its shares, the total number of shares outstanding (and available for trading) in the market is subsequently reduced post-buyback.
Stock buybacks often demonstrate that the company has sufficient cash set aside for near-term spending and point to management’s optimism about upcoming growth, resulting in a positive share price impact.
Since the proportion of shares owned by existing investors increases post-repurchase, management is essentially betting on itself by completing a buyback.
In other words, the company might believe its current share price (and market capitalization) is undervalued by the market, implying a stock buyback is a profitable move.
How Does a Stock Buyback Work?
Sustainable, long-term value creation stems from growth and operational improvements – as opposed to just returning cash to shareholders.
Yet, share buybacks can still affect a company’s valuation, either positively or negatively, contingent on how the market as a whole perceives the decision.
- Positive Stock Price Impact → If the market incorrectly under-priced the cash a company owns in the valuation, the buyback can cause a higher share price.
- Negative Stock Price Impact → If the market views the buyback as a last resort, signaling that the company’s pipeline of investments and opportunities is running out, the net impact is likely negative.
The core issue here, however, is that no real value has been created (i.e., the company’s fundamentals remain unchanged post-buyback).