Why Do Companies Buy Back Their Own Stock Shares?
- Share price is determined basically by two factors: supply and demand. Demand is the public's desire to own a piece of the company. Supply is the number of outstanding shares. Companies can increase demand if they have good news to share with the public. If there is no news forthcoming and the share price is falling, the company doesn't have a way to increase demand. However, a stock buyback allows the company to decrease the supply. The result is the same. The share price increases.
- When the company has profits that it is willing to pay out to shareholders, the amount of money is divided by the number of issued shares. By buying back shares, the number of issued shares is reduced. When the company divides the total dividend amount by fewer shares, the amount of dividend paid out per share is increased. This is a positive indicator to investors that makes the company more attractive to investors.
- When company management buys back company stock, it shows that company management considers the stock to be value priced. According to Minnesota Public Radio, some research shows that management knows when the stock is value priced. So when investors see the company doing a buyback, they will look at the stock more closely and are more likely to purchase it.
- By buying back shares of a company, management may be showing it is preparing to purchase another company or trying to protect itself against a takeover from another company. Offering shares of company stock as an incentive to shareholders is a common element in one company's purchase of another company. So if a company owns more shares of itself, it can offer more in a buyout deal. Also, if there are fewer issued shares in a company, it means there are fewer shares available for another company to begin buying them up in order to take over the company.