| When a company buys back shares of its own stock | | | | To share its profits with shareholders, and to |
| from the public in an open market, it is referred to as | | | | distribute excess money. It offers the investors a |
| stock buy back. The reasons for stock buybacks | | | | chance to save taxes as compared to issuing |
| vary but there are three main reasons that make | | | | dividends, investors usually pay 20% capital gain |
| companies decide to buy back shares. A company's | | | | taxes for repurchases where as they pay 39% for |
| decision to buyback shares could be an investment | | | | dividends. This method gives the shareholder the right |
| decision, or to effect a change in the company's | | | | to receive or decline taxable money. It is a safer |
| structure to increase its leverage or could be a | | | | alternative to issuing dividends for the company. |
| payout decision to have an alternative to issuing | | | | To increase a demand for its shares and increase |
| dividends as well as to save taxes paid on dividends. | | | | stock prices and to stabilize fluctuating prices |
| Undervalued stocks and buybacks are interrelated | | | | Shareholders Benefits: |
| issues. | | | | Shareholders also benefit from stock buybacks as it |
| Why Companies Buy Back Shares: | | | | results in lesser number of outstanding shares |
| When the company feels its shares are undervalued | | | | correspondingly increasing earnings per share as well |
| due to the market turbulence of an "off and on" | | | | as influence acceleration in the rate of increase. |
| bear market. It is done to send a message across | | | | Undervalued stocks and buybacks send a clear |
| that the company is confident and is therefore | | | | message that the company feels its share are not |
| investing in it. Buybacks makes it possible for a | | | | correctly priced, and that it is confident in its growth |
| company to earn 15% returns during the first three | | | | to demand a better share value. It could be a great |
| years after a buyback. | | | | pr move for the company if properly executed. It |
| The company may decide to invest in itself as it may | | | | could reflect badly if the firm's officers sell their share |
| offer a higher rate of return than other investments. | | | | of the company stock when the company is |
| To protect themselves from hostile takeovers | | | | repurchasing its shares. |
| To change its capital structure, where by it reduces | | | | If carefully planned and executed, undervalued stocks |
| the cost of capital, reduces equity, and adds debts. | | | | and buybacks could benefit both the company as |
| However, this concept is not as popular as it was | | | | well as he shareholders. |
| once as companies currently seek to lower debt to | | | | There are firms that offer their services as well as |
| equity ratio and not increase debts to offset equities. | | | | products to help run businesses smoothly. |