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What are the advantages of Share Buyback?
Share buyback can be advantageous in numerous ways. Some of the advantages of buyback are as follows −
Return of Surplus Cash to the Shareholders
A company that buys its shares back can offer surplus cash to its shareholders. This will increase the loyalty and confidence of the shareholders in the company. Offering more cash as dividends can also boost shareholders’ wish to own more shares which has a positive impact on the operations of the company.
Increase in the Value of Shares
A share buyback program reduces the number of outstanding shares in the market. This increases the value of the shares. As the operating efficiency and P/E ratio remain the same, the market price of shares goes up. This helps the shareholders to increase their wealth in an easy and affordable manner.
Increase in Price of Undervalued Share
When a company buys the shares back, it may tend to increase the value of its undervalued shares. As the prices of shares go up due to an increase in P/E and EPS, the undervalued shares may see a rise in price when the buyback is executed.
Reaching the Perfect Capital Structure
When a company has high equity it can go for the right capital structure more smoothly. With a huge surplus of cash, companies can reduce equity capital by buying back the shares.
Consolidating the Control
Buying back the shares helps companies consolidate their control over the company’s ownership. As the number of shares goes down in the market, the number of external shareholders also goes down. This lets the owners of the company have more control over the company. Moreover, as the total number of outstanding shares goes down, owners of the company can take corporate decisions and steer the company with more prudence.
Usually, dividend payments are taxable in most countries. However, taxation can be avoided when the company consolidates its ownership of the company. There is no tax in consolidating the shares which leads to an increase in share prices that may increase the wealth of shareholder’s wealth too.
Stopping a Hostile Takeover
When a firm feels the danger of an impending hostile takeover, it can lower the number of shares available in the market by buying its shares back. This helps the companies maintain the ownership, avoiding a takeover that may flip it.
Share buyback has many advantages. However, it is not suitable for all companies. It is especially suited to large corporate firms that have a huge surplus of capital and command a great deal of operating efficiency for the long term in the future.
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