I’ve talked in the past about companies buying their stock back, but today, I want would like to go into a little more in detail about this because we saw a record number of repurchases in 2018.
What does “repurchase” mean?
According to Investopedia, companies buy their shares from the marketplace by using its cash to buy their own shares. In other words, they’re investing in themselves.
So, what is the outcomes of companies repurchasing their shares?
The number of outstanding shares are reduced because they’re buying their shares back, and indirectly, the relative ownership stake of each of the current investors increases because there are fewer shares outstanding.
Why would companies buy their share back?
Some companies indicate that it’s the best use of their capital. In other words, they indicate they don’t see any better investment than themselves. They also feel that the stock has been beaten up and that it is undervalued, also, they feel that it may help their overall financial ratios.
If they’re buying their stock back, it’s typically going to increase their ROA because they’ve used cash as an asset, and it’s been reduced.
It should also increase their ROE, and if they continue to make the same amount of money, their EPS will increase, which in turn means their P/E ratio is reduced, and normally, the market likes a lower P/E ratio versus a higher P/E ratio meaning their stock looks more attractive.
As I mentioned at the beginning, according to Standard & Poor’s, 2018 saw a record number of stock repurchases by companies, as they bought a total of $806 billion of their own stock back, beating the previous record in 2007 that was total repurchases were $589 billion.
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Stock investing involves risk including the loss of principal.
Return on Assets (ROA) is an indicator of how profitable a company is relative to its total assets.
Return of Equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders’ equity.
Earnings Per Share (EPS) is the portion of a company’s profit allocated to each share of common stock.
Price to Equity Ratio (P/E Ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.