What is Share Repurchase?

by Investing School on March 18, 2011

The term “Share Repurchase” refers to a practice through which corporations are able to buy back shares of their own stock from the shareholders. This transaction is also known as a “stock repurchase” or a “share buyback.” Share repurchases have become increasingly common in the US over the course of the last twenty years.

A share repurchase offers cash to current shareholders for a portion of the company’s outstanding equity, which diminishes the number of shares the company has outstanding. After the repurchase, the company will choose either to retire the shares, or to hold them for re-issue at a later time. Corporate laws in the US provide specifically for five different forms of stock repurchases. These include private negotiations, repurchase put rights, open market, and two separate kinds of self-tender repurchases known as fixed price tender offers, and Dutch auctions.

Share repurchases are an opportunity for companies to use retained profits. In the event that a company makes a repurchase of its own shares, it effectively decreases the amount of its shares that are held by the public. This reduction of “the float”, or the publicly traded shares, leads to the result that the earnings per share will be increased, even if the level of profits should remain constant. This means that the repurchase of shares, especially in cases where a company’s share price could be considered undervalued, could still be the cause of a good return on investment.

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