I own 3000 shares of a company that recently announced it is going to purchase and retire 26% of its outstanding shares of stock from current shareholders. Why would they do this? The price is less than what I paid, so if I sell, I will have a loss.
Companies will sometimes buy back their own stock to prevent a hostile takeover, such as Nintendo did a few years ago when they apparently faced that very danger.
In addition, if a company can buy back its own stock at a bargain price, it will make the remaining stockholders happy. The earnings-per-share figure goes up, and if they’re paying dividends, they’ll be bigger because there’s fewer shares to pay to.
I don’t like it, myself. If they have no more imaginative things to do with their excesss cash, give it to me, the stockholder.
Starbucks regularly buys back stock in order to use it in their employee stock options program. Since there’s a finite number of stocks available, companies have to get the stocks they’re granting to their workers from somewhere, right?
No, they can create more shares any time they want, either by issuing new equity or doing a split. The former reduces the value of outstanding shares, though, so that requires significant shareholder approval under most circumstances.
Buying back shares is also an investment. If they consider the share price to be undervalued, buying them back, to sell later at a higher price or to use for options, might be better than other things they can do with the money.
Another reason that I understand for some companies to want to buy back stock is that, AIUI, stock issues are sometimes counted against a company’s assets and earnings power when it comes time for the company to be looking for credit. The impression I have is that retiring a fraction of a company’s outstanding stock issue will often have the effect of making the company look like a better credit risk - allowing the company to get the same kind of benefits a person with better credit can get: Lower interest rates, more flexible payment schedules, or more funds via a loan.
Another benefit is that the remaining blocks of stock become a larger voting percentage. Retiring them prevents them from returning to circulation. Creating more stock in the future via a split doesn’t change the percentages.
The number of shares of a corporation is authorized by the charter or other master governing document. The annual financial report should have a note on the income statement or balance sheet to the effect of “4,000,000,000 shares authorized, 1,134,523,135 issued.” And the proxy may have a proposal to the effect of “amend the articles of incorporation to change the number of authorized shares from 4,000,000,000 to 6,000,000,000.”
And there are cases where public companies buy back all of their stock in order to revert to a private company.
They also do it for the same reason you do it - they feel their stock is at a bargain price right now, so they buy it and put it into their treasury. If, in the future, they need to raise capital they can sell the treasury stock - hopefully for more than they bought it for.
They won’t buy your stock unless you choose to sell it (i.e. they can’t usually go out and say "you have to sell us your stock - unless it is a buy back of all stock). So if you want to hang onto it, you can. And you should see this as a good sign - it often is.
A company may also do this as an effect of hearing some good news or a good feeling about a new product. Apple’s run up in stock prior to the iPhone is a good thing. If the Board had felt that the iPhone was a certain hit, as the iPod was, they’d buy it back to increase their own position when the price spiked.
That happened at a company I worked at. The IPO was at $12.00 a share. 5 years later the company was bought out and taken private. It was trading around $7.00 and bought out at $8.50.
There were a bunch of pissed off employees who bought in at the IPO. :mad:
Well Jim Cramer usually thinks a company buying its own stock is a good sign.
No one seems to have mentioned this: buying back your own stock is a “tax-free” way of returning money to the shareholders. Issuing a dividend is a taxable event for shareholders. Buying back stock makes all remaining stock more valuable (due to the previously mentioned “fewer shares to spread the earnings over”).
Presumably, the share price will rise and the shareholder gets to decide when they want a taxable event (i.e., selling the stock) instead of the company generating a taxable event (issuing a dividend).