Subject: Stocks - Repurchasing by Companies

Last-Revised: 11 Nov 1996
Contributed-By: Bob Bose (bobbose at sover.net)

Companies may repurchase their own stock on the open market, usually common shares, for many reasons. In theory, the buyback should not be a short term fix to the stock price but a rational use of cash, implying that a company's best investment alternative is to buy back its stock. Normally these purchases are done with free cash flow, but not always. What happens is that if earnings stay constant, the reduced number of shares will result in higher earnings per share, which all else being equal will result, should result, in a higher stock price.

But note that there is a difference between announcing a buyback and actually buying back stock. Just the announcement usually helps the stock price, but what really counts is that they actually buy back stock. Just don't be fooled into believing that all "announced share buybacks" are actually implemented. Some are announced just for the short term bounce that usually comes with the announcement. Those types of companies I would avoid as management is out to deceive their shareholders.

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