Which companies are buying back stock?
Global corporations have more cash than they did before the pandemic. Share buybacks have risen in recent years, and many firms are repurchasing their stocks.
While some companies have intensified their stock buyback programs, most haven’t. This presents potential opportunities for investors. Stock buybacks may have exceeded $1 trillion in 2021, according to preliminary data from Standard & Poor’s.
Stock buybacks usually take shares off the market and provide upward pressure on earnings per share. In turn, it pushes stock prices higher.
What are stock buybacks?
Once considered illegal, stock buybacks were legalized in the 1980s. The practice became commonplace in the last 15 years, emerging as a standard operating procedure for many companies.
Simply defined, a stock buyback, or share repurchase program is when a company repurchases its shares in the marketplace. The practice reduces the number of outstanding shares available in the market, and in turn, increases the company’s earnings per share.
Companies often execute share re-purchases in two ways. The first is a direct purchase from shareholders. In this approach, a firm presents an offer to shareholders that specifies how many shares the company wants to re-purchase from the market and the price range it will pay for those shares. The price range is usually above the prevailing market price. In turn, shareholders respond to the offer by indicating how many shares they are willing to sell and the price they will accept. Once the company receives the counteroffer from the market, it proceeds to execute the repurchase at the lowest cost.
The second option is to buy back shares in the open market. In this option, the firm simply buys their own shares on the open market (like everybody else), as of they were a retail investor. However, when a company announces they will buy their own stock, the stock price tends to rise as the market reacts -eventually, the company ends paying a higher price than they initially planned.
What are the effects of a stock buyback for a company?
Some of the major impacts of stock buyback on companies include, decrease in market capitalization, increase in earnings per share and a decrease in book value per share.
Market capitalization is computed by dividing the number of a company’s outstanding shares over that firm’s price per share. Reducing the number of outstanding shares through share buyback thus reduces a company’s market capitalization. Similarly, since a stock buyback reduces the number of outstanding shares in the market, a company’s earnings per share will rise.
Meanwhile, since the key denominator for calculating a company’s book value per share is outstanding shares, having fewer outstanding shares lowers the accounting value of each share.
How can investors benefit from stock buybacks?
For investors, the benefits of stock buybacks are only realized when a firm re-purchase their stock at a lower intrinsic value than what the stock’s future value will be.
Stock buybacks often result in increase in value (price) of the remaining shares (in the market). This means that while the shareholder may own fewer shares, the shares they continue to own should increase in value.
Since there are fewer outstanding shares, each representing a piece of ownership in the company, each of the remaining shares provides a larger ownership stake for investors in the company.
Stock buybacks also present tax advantages to investors. Stock buybacks are taxed lower than capital gains in most jurisdictions. In fact, investors can defer capital gains if share prices increase.
Which companies are buying back stock?
Several companies, including Pfizer, Nike, Walmart, and Broadcom, are good candidates for stock buybacks. These companies and others are believed to be sitting on cash and may embark on buying their stocks soon.
Most US companies may embark on stock buybacks after the Federal Reserve forced interest rates drastically lower to allow firms to borrow money to shore their operations, including improving employment and supply chain management.