What is a share buyback?
Holly Warburton talks as part of the Guernsey Press Business Panel.
A share buyback is when a company purchases its own shares in the market, essentially back from the shareholders. The impact of doing this is that it reduces the number of shares outstanding, i.e. those which are held publicly and traded, which in turn can create value for shareholders as now each share is worth more as a percentage of the overall value of the business.
Companies normally announce a share buyback program where they periodically purchase their own shares over a period of time. Nestlé, for example, has recently stated plans to buyback CHF20bn worth of shares over a 3 year period. Typically management will do this when they believe that the shares are currently trading at a price less than they are worth.
On paper, it also improves some of the firm’s financial metrics. For instance, earnings per share will be boosted and shareholders’ dividends will increase (assuming earnings and the total dividend amount paid out remains the same). As with any corporate event it is important to review the terms, as while the majority of companies will aim to add shareholder value through performing a share buyback, the likely boost to the share price and financial ratios can be a motivation to mask other financial concerns.
GP Business Panel 27 July 2017