The ins and outs of share buybacks

Julie Brownlee, Fsp Invest, 18 Aug. 2015

Tags: share buybacks, what are share buybacks, advantages of share buybacks, disadvantages of share buybacks, investing in shares,

When you invest in shares, you hope the share price will rise over time.

As well as seeing a share price rise, it’s always a positive sign when a company returns cash to its shareholders. One of the most common ways of doing this is by paying a dividend.

But there’s another way a company can reward its shareholders. And this is by buying back its own shares.

So what exactly does a share buyback entail? And is it always a good thing for investors?

Read on to find out…

The rationale behind share buybacks

Companies embark on share buybacks so that its earnings (or profits) span across a lower number of shares. By doing this, a company should see its earnings per share (EPS) rise.

By increasing its EPS, the company hopes its share price will rise as a consequence. This means that shareholders see the value of their shares rise and their potential profits increase.

Are share buybacks a good thing for investors?

If a company goes through with a share buyback with the full intention of rewarding its shareholders, then it is a good thing. But this isn’t always the case and it depends how the company goes about the transaction.

In some instances, a company borrows money to buy back its own shares on the open market. This means a company has taken on debt to do it. This isn’t a good thing.

If a company pays too much for its shares in the open market, it’s not a good thing for shareholders either. A company should aim to buy shares when they’re trading for less than they’re worth.

And sometimes a company buys back shares for management gains. For instance, management may have a bonus linked with EPS.

Whilst share buybacks can be good for shareholders, there are times when they are not.

So there you have it. The ins and outs of share buybacks.

*********** Advertisement ************


This experienced sports analyst won 95% of the bets he placed in the last six months.

And so did the 650 people following his tips…

Read on to find out how you, too, can CASH IN on his tips for the next big win…


Related QA

willz asked:
Good day I see the share price of Hulamin has dropped continuously since November 2017. Apparently it is a very good buy. Why does the price keep on [read more]
Published at 10 Feb. 2018 in: Shares & Stock Ideas Share price 1 Answer
BrianD asked:
Can you please advise me what is all required to get set-up for CFD trading? – as per the adverts from Timon? I note the quarterly fee, but what [read more]
Published at 13 Dec. 2017 in: Shares & Stock Ideas Cfd 1 Answer
DRTANYA asked:
I received shares form NETCARE in 2006 and forgot about it and now I am not sure if it is still available or valid anymore - who can I mail or [read more]
Published at 04 Dec. 2017 in: Shares & Stock Ideas 1 Answer
While I have been following Francois suggestions on the Red ?Hot Penny Shares since February this year, I am still not certain how long I am meant to [read more]
Published at 29 Aug. 2017 in: Shares & Stock Ideas Buy Sell Hold 2 answers
nmaranele asked:
Good day, What would be the right amount to invest as a minimum for equities to see tangible results? [read more]
Published at 18 Aug. 2017 in: Shares & Stock Ideas Minimum invetsment 1 Answer

Related articles: