A share repurchase program is a company-led initiative to buy back outstanding shares in the stock market with excess cash from its balance sheet. Management will make a decision to buy shares and retire that stock if they believe investors are undervaluing the company. The share repurchase will typically boost the price of the stock and lower the shares outstanding, which increases an investors percentage of equity ownership in a company. While it is intended to benefit investors, shareholders might prefer management use the excess cash flow and return it to investors in the form of cash dividends.
One benefit to issuing a share repurchase program is that it will probably lead to improved earnings per share. This is a result of eliminating outstanding shares from the stock market. When a company buys back its own shares, it also indicates that board members believe the stock is trading at a discount. Investors might use this sign as an opportunity to enter a position in a stock that could very well rise in value if the company has a solid balance sheet.
The purpose of a share repurchase is to increase the value of a stock, and benefits are intended to extend from investors to company insiders. There are certain conditions surrounding a repurchase of shares that would be less than ideal for shareholders, however. For instance, companies sometimes issue stock options to employees as a reward. If they issue a share buyback and then use those shares as employee incentives, they are raising the total number of stocks held rather than lowering it by retiring shares. A higher share count could dilute or artificially inflate future earnings.
An accelerated share repurchase program reflects the way contracts are traded in the futures market. In an accelerated trade, a company's management team purchases shares from an investment bank for a pre-determined price at a certain date. Before supplying the stock to the company behind the accelerated program, the investment bank borrows the shares through what's known as a securities lending program. The benefit to the company is that it is able to buy its own shares at a fixed price, and it will be rewarded if the stock value rises.
Multiple sets of circumstances might inspire a share repurchase. For instance, if a company delivers positive quarterly earnings results, management expects that investors will show their appreciation by purchasing additional stock. Investors, however, may be focused on something else entirely, such as an economic indicator that demonstrated some weakness in the broader economy. When investor sentiment is negative or fearful regardless of the reason, good news — even positive earnings growth — may not be enough to keep them invested.