Benefits of Share Buybacks

The theory behind share buybacks is that they reduce the number of shares available in the market and—all things being equal—increase EPS on the remaining shares, benefiting shareholders. For companies flush with cash, the prospect of bumping up EPS can be tempting, especially in an environment where the average yield on corporate cash investments is barely more than 1%.

In addition, companies that buy back their shares often believe:
- The stock is undervalued and a good buy at the current market price. Billionaire investor Warren Buffett utilizes stock buybacks when he feels that shares of his own company, Berkshire Hathaway Inc. (BRK.A), are trading at too low a level. However, the annual report emphasizes that Berkshire's directors will only authorize repurchases at a price they believe to be well below intrinsic value.
- A buyback will create a level of support for the stock, especially during a recessionary period or during a market correction.
- A buyback will increase share prices. Stocks trade in part based upon supply and demand and a reduction in the number of outstanding shares often precipitates a price increase. Therefore, a company can bring about an increase in its stock value by creating a supply shock via a share repurchase.
- Buybacks can also be a way for a company to protect itself from a hostile takeover, or signal that the company plans on going private.