Corporate actions
Share buyback
Also called Repurchase
A company buying its own shares in the market, reducing the number in issue.
How it works
With fewer shares outstanding, each remaining share represents a larger slice of the business, so earnings per share rise even if profits do not.
Buybacks are an alternative to dividends for returning cash, and are more tax-efficient in many jurisdictions since no income is received.
Where it misleads people
A buyback only creates value if the shares are bought below intrinsic value. Companies have a well-documented habit of buying heavily at peaks and stopping in downturns, which is exactly backwards.
Related terms
- Earnings per shareNet income divided by the number of shares — the profit attributable to each share you own.
- Shares outstandingThe total number of a company’s shares currently held by all its investors.
- DilutionThe reduction in your ownership share when a company issues new shares.
- Share-based compensationPaying employees in shares or options rather than cash.
- Intrinsic valueWhat an asset is actually worth based on the cash it will produce, regardless of its market price.
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