Why do companies repurchase their own stock?

The degree of corporate governance and control is in direct relation to the degree of ownership. Thus companies buy back the stock they have previously issued in order to increase the control they have over the share price and the actions of they can take as management. At one end of the corporate spectrum is the sole owner with 100% of the stock and the last word on whatever the company does. At the other end of the spectrum is the fully quoted corporation where people and organizations outside of the company management structure hold 100% of the stock. Although this is a very rare circumstance and most companies have a mixture of publicly owned stock, management owned stock and employee owned stock.

The most significant effect of repurchasing stock that a company previously offered on the stock market is to give each of the non-public owners a bigger share of the total stock and therefore more say in the running of the company. The repurchase of their own stock is usually a sign of company confidence in the earnings potential of the stock.

It can also be an attempt to improve the price to earnings ratio of the stock. This is a key analysis tool of stock market dealers when recommending or otherwise any individual stock because it affects the overall market capitalization.

Buying back of company stock is also an opportunity to put that stock into the ownership of the employees. This can be both a motivating technique to increase employee commitment and a method of increasing the benefits part of the full employees remuneration package.

A buyback of company stock has to be approved by a majority vote of the current company stockholders. Once approved this strategy does not necessarily have to be carried through to an actual repurchase of all or even part of the proposed buyback stock. If the effect of a buyback announcement is to raise the company profile and boost it’s share price then the board of directors may not actually go through with it.

A repurchase of your own stock is a significant financial move for any company. But it can be a very good one, particularly if the company managers believe that the stock market is under-valuing its stock. The true financial effect of a buyback is to reduce the dividend payout and therefore increase the money retained within the business for further investment.

Be Sociable, Share!

Leave a Reply