Share Repurchase

Share repurchases are a way of returning cash to shareholders, alongside or instead of dividends. When a company buys back shares, each remaining share represents a larger slice of the company.

For example, a company with 100 million shares and net income of 200 million has earnings per share of 2.00. If it buys back 10 million shares and profit stays the same, earnings per share rises to about 2.22, because profit is now shared among 90 million shares.

Companies repurchase shares for several reasons: to return surplus cash, to signal that management believes the shares are undervalued, to offset dilution from employee share plans or to adjust their capital structure.

Repurchases offer flexibility. Unlike regular dividends, which shareholders expect to continue, buybacks can be increased, reduced or paused without the same negative signal. In some countries, they may also be more tax-efficient for shareholders than dividends.

Critics argue that buybacks can be used to boost earnings per share in the short term, sometimes at the expense of long-term investment, and that buying shares at high prices can destroy value.

Note: Buyback means the same as share repurchase.