versions. Voodoo economics as Bush Sr. said. When I was a kid I saw Galbraith speak at a college event, a special memory.
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- Stock Buybacks: Why Do Companies Buy Back Shares? Investopedia, Jan. 12, 2024
A stock buyback occurs when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors.
When a company repurchases its shares, it can purchase the stock on the open market or from its shareholders directly. In recent decades, share buybacks have overtaken dividends as a preferred way to return cash to shareholders.
Though smaller companies may choose to exercise buybacks, blue-chip companies are much more likely to do so because of the costs involved.
- Key Takeaways: Companies do buybacks for various reasons, including company consolidation, equity value increase, and looking more financially attractive. The downside to buybacks is they are typically financed with debt, which can strain cash flow. Stock buybacks can have a mildly positive effect on the economy overall.
- Reasons for Stock Buybacks
Because companies raise equity capital through the sale of common and preferred shares, it may seem counter-intuitive that a business might choose to give that money back. However, there are several reasons why it may be beneficial for a company to repurchase its shares, including reducing the cost of capital, ownership consolidation, preserving stock prices, undervaluation, and boosting its key financial ratios. (In Canada, it is called a normal-course issuer bid (NCIB) when Canadian companies buy back their shares).
Stock Repurchases Reduce Costs: Each share of common stock represents a small stake in the ownership of the issuing company, including the right to vote on the company policy and financial decisions. If a business has a managing owner and one million shareholders, it actually has 1,000,001 owners. Companies issue shares to raise equity capital to fund expansion, but if there are no potential growth opportunities, holding on to all that unused equity funding means sharing ownership for no good reason.
Businesses that have expanded to dominate their industries, for example, may find that there is little more growth to be had. With so little headroom left to grow into, carrying large amounts of equity capital on the balance sheet becomes more of a burden than a blessing...
https://www.investopedia.com/ask/answers/042015/why-would-company-buyback-its-own-shares.asp
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