With the economy recovering further, share buy-back programs are rapidly becoming a rage among companies and investors. When a company has surplus money at the end of the day, there are only a few things that it can do with it. They can save it for a rainy day, invest in new property and equipment for the company, buy another company, pay off debts, issue a one-off special dividend to shareholders or buy back shares of their shares on the open market. A “share buy-back program”, which can also be called a “buy-back of own shares” program, is when a company recovers its shares from the current shareholders through the open stock market. Repurchase programs can be seen as a signal that a company believes its shares are undervalued and is often seen as an efficient way to repay money into the pockets of its shareholders.
The positive aspects
1. Income in stock Price of share buyback program
Wall Street and market investors usually see announcements from companies buying back their own shares as a good sign. A purchase of own shares shows that the management of a company believes that its shares are undervalued. The company must buy the shares on the free market and return them to the company’s treasury, essentially withdrawing them from circulation, reducing the total number of outstanding shares. So there are two effects: 1) Each share now becomes more valuable because each share now owns a larger percentage in the company (whose underlying profitability and economy have not changed) 2) The laws of supply and demand go into effect. There is an increase in demand for the company’s shares by the company itself and possibly also by other investors, while the supply is being reduced. Economic theory therefore states that these prices will rise as a result.
2. Prevents companies from collecting cash
Despite the fact that the economy got better and started to recover from the recession that held the financial markets in 2008 and 2009, companies are still concerned about the potential for sustained economic turmoil. Many companies keep a larger amount than normal on their balance sheets, similar to the emergency fund of a family, in the event of potential problems. A share buyback program is a good sign for investors that companies have not only saved enough money for a rainy day, but also have a positive outlook on the future prospects for the company and its sector. If a company feels comfortable enough to buy back shares of its shares, it essentially states that it believes there is a low chance of more economic and business problems.
3. Share repurchase Give companies other options
By buying back shares, a company can reduce the additional cash it has on its balance sheet without having to raise the company’s dividend before they are ready. Many companies have major strategic growth plans, similar to an entrepreneur’s business plan, that include many factors about how management plans to grow the business. One of the factors in the strategic plan is often a strategy for the steady growth of their dividend over time. If the increase in the company’s cash balance is temporary, it may be more beneficial to pass on that increased cash value to the shareholders through a share buyback program instead of trying to impose an increased dividend yield that is not sustainable in the long term.
The negative aspects
1. Share income is a sign of a lack of future growth
Buy back shares of a company’s shares from investors that the company has nothing better to do with its available cash. A share buyback program is particularly troubling for ‘growth’ investors who own the company because they see high potential future growth in both the company’s sales and profits. When a company chooses to spend its cash on its own shares instead of reinvesting in the company through capital expenditures or acquisitions of smaller competitors, it signals to investors that there are not many other profitable opportunities to grow the company .
2. Companies do not have to adhere to purchasing announcements
When companies announce that they will buy back shares, they usually see a favorable day on the stock market. But the only problem is that it’s just an announcement. There is no obligation for companies to keep their promises to buy back their shares if things change in the market and in the economy. They can stop buying shares at any time. So if, for example, a company says it is buying back a million shares, it can then choose to buy only a few shares or not buy at all. This happened in 2007 when the housing market started to implode. Home Depot announced it would buy back $ 10 billion in shares, but ended the share buyback program to save money during the impending market problems.
3. Share income Put companies at risk
A company must know with reasonable certainty that its activities are on the right track to recover or continue to grow before paying dividends or receiving shares of shares. Hurrying to buy back shares can put a company in a dangerous and dangerous position. If the economy is going through a recession, the company faces a number of difficult obstacles, or the business sector gets into some headwinds, the company will be in a very difficult position to support itself without the necessary money. For this reason, many investors want companies to maintain a high level of cash reserves in order to prevent potential weaknesses in sales or business activities.
Like all things on Wall Street, share buy-back programs have their good and bad points. But overall, a stock buyback announcement reflects positive signals from corporate management that the company and the economy are doing well. The number of shares that are traded is a quick way for a company’s management to communicate with Wall Street that a company’s stock price may be undervalued and the outlook is bright.
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