The buyback of shares has always been a topic of debate. Some people consider it a wrong move for the reputation and future of a company, and some think otherwise. So the question is, are there really any advantages of buyback of shares?
Let the discuss the same in this article.
Buyback as the term indicates simply means buying the shares back. It is the process where a company repurchases its own outstanding shares. This reduces the overall shares available in the market. This can be considered a way in which the shares return to their stakeholders.
Now, there can be different reasons for buyback of shares, and it can differ from one company to another. These reasons include decreasing the number of outstanding shares in the open market, getting an opportunity to invest in themselves, rectifying the stock price of an undervalued stock, choosing a tax-effective method of paying compensation to the stakeholders, and much more.
No matter the cause for the buyback of shares, it is still a very new concept in India, and therefore, it is important to understand if a share buyback is good for investors and whether you should apply for buyback of shares.
Let us, therefore, have a look at the advantages of buyback of shares.
Benefits of Buyback of Shares
Since it is a very new concept in India, a lot of people still wonder if there is actually some logic behind the companies repurchasing their own shares. But as it is gaining popularity is increasing now, everyone wants to know the advantages of buyback of shares.
Let us have a quick look at some of them.
Rectifies the Value of Shares
A company usually buys back the shares when it thinks they are undervalued and deserve upward growth. This works on certain levels as it is one of the most important advantages of buybacks. If a company is buying back the shares because it is undervalued, then it is a positive sign as the company is confident that it foresees good growth.
So, when a company buy back the shares, some of the shareholders will give up their shares, and the ones that will hold on will possibly get a good return in the future.
This is highly dependent on the fact that the company understands the true value of the company and makes its assessment on the right grounds.
Tax- effective Compensation for the Shareholders
When a company is performing well and generates a great profit, it gifts the shareholders in terms of dividends. This is the company’s way of making the shareholders feel one with the company. But lately, the taxes levied on the dividends have increased significantly. So, what should the company do in such a case?
The companies usually opt for buybacks. In this case, the company repurchases the shares from the existing shareholders at a higher price and pays them the compensation. This works great for shareholders as they get great profits.
Increase in Earnings Per Share and Other Ratios
Earnings per share is an important aspect when it comes to determining the value of a company. When a company buyback its shares, it is significantly reducing the number of existing shareholders. This means that each of the remaining shareholders will have more stake in the company now, increasing the earnings per share as well. (Condition- the profitability does not decrease) This also has a positive impact on ROE and other such ratios.
This works well for the company’s reputation as well as the shareholders as their take on the company will increase.
A rise in Share Prices
As we are aware that the entire stock market works on the concept of demand and supply. When a company repurchases its shares, it subsequently reduces the number of shares in the open market. This increases the demand for the shares and consecutively the supply reduces.
All these factors result in an increase in the company’s share prices, giving the existing shareholders and the prospective investors to increase their profit.
This also helps at the time of any unfavorable market conditions as the prices of the particular company increase with the buyback, even when the market is moving downwards.
Right Use of Extra Surplus
If the company is paying dividends and is willing to purchase its own shares at a higher price, this sends a positive signal that the company has surplus cash and good profitability. Rather than investing in other companies and getting stuck there, the companies attempting buybacks are investing in themselves and this also sends a positive signal to the investors. This shows that the company is stable and is very confident in the future growth perspectives.
So, with the buybacks, a company uses its surplus in the right places.
There are various advantages of buyback of shares and if a company is rolling out one, it is important to analyze it before reaching any conclusions. You can learn stock market and its various concepts like buybacks through stock market courses and learn everything that is necessary to make you an expert. Hope you are now clear about the benefits associated with the repurchase of shares by the companies.
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