Repurchase of stock

Repurchase of stock

A stock buyback, often known as the repurchase of stock, has a prominent position in corporate finance. Companies buy back their shares to manage their capital structure and return cash to shareholders. Through this practice, a business effectively lowers the total number of outstanding shares by purchasing back its shares from the market. Repurchasing stock shares may have several effects, such as raising profits per share, improving shareholder value, and expressing optimism about the company’s prospects. 

What is the repurchase of stock? 

Repurchasing stock, often known as a stock buyback or share repurchase, refers to a company buying back its existing shares from current owners. Either open market or secretly arranged agreements may be used for the repurchase. Stock repurchases may be carried out for several reasons, including capital restructuring, transferring surplus cash to shareholders, increasing earnings per share, or avoiding hostile takeovers. By lowering the number of outstanding shares through share repurchases, the business can increase the ownership percentage and value of the remaining shares owned by shareholders. 

Understanding the repurchase of stock 

Repurchasing stock involves a corporation utilising cash or borrowing money to acquire shares on the open market or from current owners. The corporation may announce a stock repurchase programme, along with details on the number of shares that will be bought back and when they happen.  

The repurchased shares are subsequently retained as treasury stock or retired, which lowers the overall number of outstanding shares. Effective capital returns to shareholders are made through this procedure, which may raise current shareholders’ ownership stakes. 

Advantages of repurchase of stock 

The following are the advantages of repurchase of stock: 

  • A corporation can improve the ownership percentage and value of the remaining shares for current shareholders by repurchasing and lowering the number of outstanding shares. 
  • The corporation’s earnings are distributed among fewer shares as the number of outstanding shares declines, potentially increasing earnings per share. 
  • Repurchasing shares of stock can be used as a safeguard against hostile takeovers. It becomes more difficult for potential buyers to obtain a controlling interest by lowering the number of shares that are readily accessible on the market. 
  • Instead of paying dividends to shareholders, firms may choose to buy their stock instead because stockholders may be taxed at various rates for dividends and capital gains. 
  • Repurchasing shares gives businesses options for spending extra income. Repurchasing stock can be a wise strategy to allocate resources instead of hoarding cash or making risky investments. 

Disadvantages of repurchase of stock 

The following are the disadvantages of repurchase of stock: 

  • Repurchasing stock necessitates using money that may have been better spent on acquisitions, debt payments, or research & development, making it harder for the business to invest in expansion opportunities. 
  • Some shareholders may interpret stock repurchases as a lack of faith in the company’s prospects for the future. This may raise questions regarding the effective use of capital allocation and potential harm to long-term shareholder value. 
  • The company’s cash reserves are reduced when money is used for stock repurchases, which may limit its future ability to deal with unforeseen difficulties or seize strategic opportunities. 
  • Repurchasing shares may lessen the potential upside for employees and executives whose stock options or other equity-based compensation plans depend on the company’s stock price, affecting their motivation and alignment with shareholder interests. 
  • Stock repurchases can be used to raise stock values temporarily artificially. This may skew market views and produce a misleading sense of value. 

Example of repurchase of stock 

The following example will help to clarify the idea of repurchasing stock. A share repurchase programme has been announced by corporation ABC, a publicly listed corporation. ABC purchases a large portion of its outstanding shares on the open market over many months.  

A total of 1 million shares are repurchased, with the repurchase conducted at US$50 per share. Consequently, fewer outstanding shares can raise shareholders’ ownership stakes and share values for the remaining shares. By taking this step, ABC desires to distribute more cash to shareholders and increase shareholder value. 

Frequently Asked Questions

When a business buys back its shares from shareholders, this is known as a stock repurchase. To repurchase shares of stock, several procedures must be followed. Typically, the firm’s board of directors must approve the repurchase programme, decide when and how much to repurchase, carry out the repurchases through open market purchases or negotiated deals, and retire the repurchased shares. 

Repurchasing of stocks, also known as share buyback, is a common practice among companies. The primary reason for the repurchase of stocks is to increase shareholder value.  

When a company buys back its shares, the demand for the stock increases, leading to an increase in the stock price. This increase in stock price benefits the existing shareholders as they can sell their shares at a higher price. The repurchase of stocks also helps companies to signal that they believe their stock is undervalued in the market and that they are confident about their future growth prospects.  

Additionally, by reducing the number of outstanding shares, the company’s earnings per share, or EPS, increases, making the stock more attractive to investors. Overall, repurchasing of stocks is an effective way for companies to allocate their capital and improve shareholder value. 

A corporation repurchasing its shares for US$60 per share would be an example of a repurchase price. This indicates that the corporation will pay the shareholder  US$60 in cash or an equivalent amount of compensation by the terms of the buyback agreement for each share it repurchases. 

The shares that the corporation repurchases are normally retired and no longer regarded as outstanding after the repurchasing, indicating that they have been taken off the market and are no longer open to trading or ownership. 

Following their firm’s rules and legal restrictions, individuals, including corporate executives and workers, may repurchase company shares during open trading periods. These trading windows often limit stock repurchases during specific times to prevent insider trading and preserve fairness and openness in the stock market. 

    Read the Latest Market Journal

    Introduction to unit trust

    Published on Apr 23, 2024 25 

    In the diverse and complex world of investing, unit trusts stand out as a popular...

    Back in Business: The Return of IPOs & Top Traded Counters in March 2024

    Published on Apr 17, 2024 482 

    Start trading on POEMS! Open a free account here! At a glance: Major indices continue...

    Weekly Updates 15/4/24 – 19/4/24

    Published on Apr 15, 2024 72 

    This weekly update is designed to help you stay informed and relate economic and company...

    From $50 to $100: Unveiling the Impact of Inflation

    Published on Apr 12, 2024 155 

    In recent years, inflation has become a hot topic, evoking strong emotions as the cost...

    Japan’s Economic Resurgence: Unveiling the Tailwinds Behind Nikkei 225’s Record Leap

    Published on Apr 11, 2024 87 

    Source: eSignal, Intercontinental Exchange, Inc. In the heart of Japan’s economic landscape, the Nikkei 225...

    Weekly Updates 8/4/24 – 12/4/24

    Published on Apr 8, 2024 109 

      This weekly update is designed to help you stay informed and relate economic and...

    What Makes Forex Trading Attractive?

    Published on Apr 2, 2024 191 

    In a world where the click of a button can send goods across oceans and...

    Weekly Updates 1/4/24 – 5/4/24

    Published on Apr 1, 2024 99 

    This weekly update is designed to help you stay informed and relate economic and company...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you

    IMPORTANT INFORMATION

    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  

     

    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com