A stock buy back, a.k.a share repurchase program, is a company buying its own shares back to hold on to.
But why would a company buy back some of its own stock?
And how does that work if you own some of their stock?
Let’s dive in…
How does a stock buy back work?
There are generally two ways a company can execute a stock buy back.
First, they can buy shares directly from the market / exchanges, just like you and me.
Second, they can offer shareholders an option to sell their shares to the company at a specific price. Generally shareholders can sell them back a higher price than the market price at that time.
Why do companies buy shares back?
There are many reasons for a company to buy shares back. All are for the benefit of the company, but shareholders and investors may see it differently.
Companies themselves perform share repurchases because they may believe their stock price is undervalued. They want a deal on their own stock. And, when you take away supply of something (like shares), the price tends to increase.
This assumes demand for the company’s shares stays the same after the buy back.
A share repurchase also increases the company’s earnings per share (EPS) ratio.
The EPS ratio compares a company’s share price to their profit. It’s meant to help investors evaluate how profitable a company is.
After a stock buy back, there are fewer shares, which immediately boosts the earnings per share. How? Well, their earnings didn’t change. But the number of outstanding shares shrank. So there’s more profit per share.
Drawbacks of stock buy backs (Shareholders Perspective)
Depending on the timing of a stock buy back, shareholders may not like the idea.
If a company has a lot of cash available and decides to issue a share repurchase, it could signal to shareholders that the company is not reinvesting profits. It could look like the company just wants to sweeten the balance sheet.
Many shareholders may also wonder if the buy back just benefits the higher-up executives. If executives want to sell some of their own stock in the company, they might push for a stock buy back, pumping the share price, giving them more profit.
Recent stock buy back examples
These are 3 examples of notable companies that announced stock repurchases and the general trend of their price action that followed.
1. Twitter 2/10/2022 – $4B buy back
Circled in red – buyback announcement (February 10th)
Circled in yellow – 1-month mark (March 10th)
Arrows – Trend after the announcement
2. Lululemon Athletica Inc. 3/29/22 – $1B buyback
Circled in red – buyback announcement (March 29th)
Circled in yellow – 1-month mark (April 29th)
Arrows – Trend after the announcement
3. Whirlpool Corp. 2/14/22 – $2B buyback
Circled in red – buyback announcement (February 14th)
Circled in yellow – 1-month mark (March 14th)
Arrows – Trend after the announcement
What do I do with this information?
If a company you like announces a stock buy back, it might be worth deciding whether you want to buy more shares before the repurchasing happens.
Otherwise, if you haven’t already researched a company, a stock buy back isn’t reason enough to buy shares.
Where this could potentially matter is with dividend stock. The price you buy shares at affects your dividend yield. So getting shares while they’re cheaper may be a smart move. However, there’s no guarantee how the stock will perform after the announcement and after the actual buy back happens.
Ultimately, do your research. Find out how the company performed after past buy back programs. Also, how’s the wider market doing? No repurchase program is going to beat a tanking market.
That’s all for now.
Happy trading,
Your fellow Stock Hackers,
🍒Cherry & Erwin
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