Buybacks

Extracted Attributes

• Purpose

  Return capital to shareholders, defer taxes for investors, increase earnings per share (EPS), stabilize stock prices, increase stock liquidity, reduce stock volatility, signal company's future, protect from hostile takeover, compensate employees

• Definition

  Reacquisition by a company of its own shares

• Taxation (US)

  1% federal excise tax on public company stock buybacks (as of 2023)

• Global Adoption

  Common practice around the world

• Potential Benefit

  Increases demand and value of company shares, provides investors with a return, offers flexibility compared to dividends

• Potential Criticism

  Can starve business of money for R&D or new products, disproportionately benefits wealthier shareholders, can widen pay gap, can obscure stock issuance to managers

• Historical Trend (US)

  Sharp rise in volume in late 20th and early 21st century

• Primary Method (Global)

  Open market repurchase (over 95% worldwide)

• Regulatory Safe Harbor (US)

  SEC rule 10b-18 (from market manipulation charges under Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934)

• Other Methods (US Corporate Law)

  Private negotiations, repurchase 'put' rights, fixed price tender offer, Dutch auction, accelerated repurchases

Timeline

• Sharp rise in the volume of share repurchases in the United States. (Source: Wikipedia)

  Late 20th century

• Continued sharp rise in the volume of share repurchases in the United States. (Source: Wikipedia)

  Early 21st century

• Apple Inc. announced a $100 billion stock buyback plan, setting a record. (Source: Web Search Results)

  2018

• New research by Vanderbilt University, in a report released by the U.S. Chamber of Commerce, found that stock buybacks have an overlooked beneficial effect on stock liquidity and volatility, while also noting heightened scrutiny for potentially having an outsized benefit for company executives. (Source: Web Search Results)

  2021-11-12

• Public company stock buybacks in the U.S. became subject to a 1% federal excise tax. (Source: Web Search Results)

  2023

• Apple Inc. announced the largest stock buyback plan in U.S. history, a planned $110 billion. (Source: Web Search Results)

  May 2024

• Discussion on the All-In Podcast criticized Apple's massive stock buybacks and debated their impact on Apple's AI strategy and long-term innovation. (Source: Related Documents)

  Undated (recent)

Share repurchase

Share repurchase, also known as share buyback or stock buyback, is the reacquisition by a company of its own shares. It represents an alternate and more flexible way (relative to dividends) of returning money to shareholders. Repurchases allow stockholders to legally delay taxes which they would have been required to pay on dividends in the year the dividends are paid, to instead pay taxes on the capital gains they receive when they sell the stock, whose price is now proportionally higher because of the smaller number of shares outstanding. In most countries, a corporation can repurchase its own stock by distributing cash to existing shareholders in exchange for a fraction of the company's outstanding equity; that is, cash is exchanged for a reduction in the number of shares outstanding. The company either retires the repurchased shares or keeps them as treasury stock, available for reissuance. Under U.S. corporate law, there are six primary methods of stock repurchase: open market, private negotiations, repurchase "put" rights, two variants of self-tender repurchase (a fixed price tender offer and a Dutch auction), and accelerate repurchases. More than 95% of the buyback programs worldwide are through an open-market method, whereby the company announces the buyback program and then repurchases shares in the open market (stock exchange). In the late 20th and the early 21st century, there was a sharp rise in the volume of share repurchases in the United States. Large share repurchases started later in Europe than in the United States, but are nowadays a common practice around the world. U.S. Securities and Exchange Commission (SEC) rule 10b-18 sets requirements for stock repurchase in the United States. Rule 10b-18 provides a voluntary "safe harbor" from liability for market manipulation under Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934.

Web Search Results

• Buyback: What It Means and Why Companies Do It - Investopedia

  Buybacks are also known as share repurchases. They allow companies to invest in themselves. Reducing the number of shares outstanding on the market increases the proportion of shares owned by investors. A company may launch a buyback because it believes its shares are undervalued and to provide investors with a better return. It increases the proportion of earnings that each share is worth. This stock price will rise if the same price-to-earnings (P/E) ratio is maintained. [...] Vikkie Velasquez Vikkie Velasquez:max_bytes(150000):strip_icc()/vikki-velasquez-investopedia-portrait-1-18b989d75f1f4d6d9b5b3a47cb3ffc5f.jpg) ## What Is a Buyback? A buyback is a company's purchase of its outstanding stock shares. Buybacks reduce the number of shares available on the open market. [...] If a company feels that its shares are undervalued, it may do a buyback to reward investors. By repurchasing shares, it reduces available open market shares, making each worth a greater percentage of the corporation. Companies with cash on hand can use buybacks for employees and management compensation purposes, using the shares for employee stock options, The buyback helps avoid the dilution of existing shareholders.

• Stock Buybacks: Why Do Companies Repurchase Their Own ...

  A stock buyback, or share repurchase, is when a company repurchases its own stock, reducing the total number of shares outstanding. In effect, buybacks “re-slice the pie” of profits into fewer slices, giving more to remaining investors. A stock buyback is one of the major ways a company can use its cash, including investing in its operations, paying off debt, buying another company and paying out the money as a dividend to investors. ### Understanding the process of buybacks [...] Buybacks can be used to cover up stock issuance to managers. If the company issues stock-based compensation to managers, it dilutes the ownership of shareholders. Some management teams use buybacks to obscure how much issuance affects share count. [...] Buybacks can starve the business of money needed in other areas, such as research and development or investment into new products and facilities. Over time, this practice can erode the competitive position of the business and weaken it.

• New Research Shows Stock Buybacks Have a Positive Impact

  Stock buybacks, also known as share repurchases, occur when a company purchases its own shares from the marketplace. Buybacks increase the demand and value of company shares, providing investors with a return on their investment. In recent months, this financial tactic has come under heightened scrutiny for potentially having an outsized benefit for company executives with large stakes in their own companies. ## Why does this matter? [...] In a recent report released by the U.S. Chamber of Commerce and published by the Center for Capital Markets, Craig M. Lewis, Madison S. Wigginton Professor of Finance, and Josh T. White, Assistant Professor of Finance and Brownlee O. Currey Jr. Dean’s Faculty Fellow, found that stock buybacks have an overlooked beneficial effect on stock liquidity (the ability for quick and low-impact transactions) and stock volatility (degree of price movement). [...] ### By using a large sample of 10,000+ U.S. companies over 17 years, the study, Corporate Liquidity Provision and Share Repurchase Programs, presents evidence that “managers [of public companies] strategically utilize share repurchases ([stock buybacks]) to increase stock liquidity and reduce volatility,” and therefore stabilize stock prices, benefiting all investors. ### The study found 6 key benefits associated with buybacks:

• Are Stock Buybacks a Good Thing or Not? - Investopedia

  Buybacks could lead to an increase in share prices, primarily benefiting wealthier shareholders and investors, as stock ownership is disproportionately concentrated among higher income brackets. In addition, funds used for buybacks could alternatively be invested in employee compensation, training, or hiring. Furthermore, executive pay packages frequently include stock options, and buybacks can directly benefit executives whose compensation is tied to stock performance, widening the pay gap [...] Buybacks benefit all shareholders to the extent that when stock is repurchased, shareholders get market value plus a premium from the company. If the stock price rises before the repurchase, those selling their shares in the open market will see a tangible benefit. The company buying back stock also has flexibility, unlike with dividends, which are paid at fixed times. They can delay or change a stock buyback program should circumstances call for it. ## Pros and Cons of Stock Buybacks [...] In May 2024, Apple Inc. (AAPL) announced the largest stock buyback plan in U.S. history, a planned $110 billion. This surpasses the company's own record of $100 billion in 2018. Here are other reasons a company might buy back its stock: Buybacks can also be a way for a company to protect itself from a hostile takeover or to signal plans to go private. ## Stock Buyback Disadvantages ### Important As of 2023, public company stock buybacks are subject to a 1% federal excise tax.

• [PDF] The value of share buybacks - McKinsey

  Buybacks aren’t without value. It is crucial, however, for managers and directors to understand their real effects when deciding to return cash to shareholders or to pursue other investment options. A buy-back’s impact on share price comes from changes in a company’s capital structure and, more critically, from the signals a buyback sends. Investors are generally relieved to learn that companies don’t intend to do something wasteful—such as make an unwise acquisition or a poor capital [...] moves, making buybacks an alluring substitute if improvements in operational performance are elusive. Yet while the increases in earnings per share that many buybacks deliver help managers hit EPS-based compensation targets, boosting EPS in this way doesn’t signify an increase in underlying performance or value. Moreover, a company’s fixation on buybacks might come at the cost of investments in its long-term health. [...] Sending signals The market responds to announcements of buybacks because they offer new information, often called a signal, about a company’s future and hence its share price.