Why perform a buyback?Buybacks can make a stock more attractive...

Why perform a buyback?

• Buybacks can make a stock more attractive to investors by increasing the company’s EPS.
• Buybacks also increase the concentration of a company's ownership among existing shareholders.
• They can also signal that the company is confident in their future growth prospects (otherwise the company wouldn’t be buying their own shares).
• In the absence of compelling growth opportunities or debt reduction, share buybacks can be an attractive and easy option for companies with surplus cash.

However, there’s more to the story:

Companies know that some investors look at share buybacks as a sign that a stock is undervalued.

This means they can sometimes be used as a tool to manipulate public perception – rather than a clear sign of future growth prospects.

Companies may buy back shares for a variety of reasons, not just because they believe their stock is undervalued. They might be trying to:

• Boost EPS to meet internal financial targets.
• Artificially boost the price of their stock, without delivering improved value.
• Offset the dilutive effects of stock-based compensation (this is where employees and executives receive shares or stock options as part of their compensation).

Also worth noting: as markets have become increasingly flooded with liquidity (from governments pumping cash into the system in the wake of the GFC), the volume of buybacks has increased substantially.