What are the benefits of a share buyback?
Here are some of the ways that buybacks work to shareholders' advantage under normal market conditions:
- First, since the company’s value remains the same but the supply of shares is lower, the share price will increase. However, that depends on market behaviour.
- Second, the earnings per share (EPS) should increase because fewer shares are in circulation. Shareholders will have a greater stake in the company’s profits.
- Unless a shareholder chooses to offload their shares, a buyback is a tax-free transaction.
Share buybacks enable companies to raise shareholder value. Under normal market conditions, the portion of profits a company uses to buy back shares should strengthen its share price.
Imagine a listed company with 1,000 shares, and 100 (10%) of them are held by one shareholder. The company runs a share buyback programme and purchases 100 shares, reducing total share capital to 900 shares. The shareholder, whose stake has just increased by 1.11% to 11.11%, is now entitled to more of the company's profits. Also, the share price should become more attractive to investors.
