Why do companies on the stock exchange “buy back” their own shares sometimes?

Falco: Why do companies on the stock exchange “buy back” their own shares sometimes?

Answers and Views:

Answer by Goofy law student
It’s usually because they have extra cash on hand and don’t have enough worthwhile opportunities to invest. They could issue a dividend or buy back some shares, if management feels that the stock is undervalued relative to the market, it is a good opportunity.

Answer by C. B.
I am aware of this practice. Toys-R-Us has a big share buyback program. The majority shareholder is the person who has control of the company because they have the most votes towards who will sit on the board of directors. Buying back shares of stock is likely to occur to ensure that a company remains in control of itself. Also it may be a revenue producing endeavor. If they are able to buy them at a lower price and sell them once more at a higher price that money is profit.

Answer by Akasanoma
If you think your stock is worth $ 10 and it is selling for $ 5 and you have some extra cash it would be wise to buy back your stock.
Just think of an idiotic scenario. All your stock is worth $ 500 and you think it should be worth $ 800. You also have $ 200 in cash. Someone could go out and buy all your stock for an attractive price, say $ 600. The holders of your stock have made $ 100 profit and they are happy but you’re not because you think your company is worth $ 1000 and they just bought it for $ 600. Guess what, they will usually turn around break the company into little pieces and sell them for a total which is well above the $ 400 they spent. Remember that the paid $ 600 but then they got $ 200 from you!
What a deal, eh!

Answer by prs
usually when a company feels its shares are undervalued, or the company has too much cash it may consider buying back shares. The shares bought back are usually cancelled, this reduces the number of share in issue and therefore raises the earnings per share (total net income divided by the number of shares in issue) making the stock appear cheaper.

Answer by errai14
The fourth answer is the correct answer. A company can not declare profit on their own stocks, even if they buy back at 5 and sell it at $ 50, not $ 1 of it will be in income, just additional capital and higher owner’s equity. The company itself has no good reason to declare a dividend or a buyback, it helps the share holders only. With less shares outstanding Earnings per share goes up, and that way the company price goes up. It’s a way to increase the share price of the company despite no growth, or little growth. Most big companies who have slow growth, but high cash flow make up their slow growth by dividends and buy backs.

Answer by MancalledDad
I agree with the writer above with just one thing to add. Look at a company’s Return on Equity, if the company has no better place to make a higher return, then a buy back is the best investment. And like the previous writer stated, buy backs decrease the number of shares outstanding, thus raising the earnings per share. After all, that is probably the most powerful engine behind a stock’s price. The people who make the buy back decision usually own some of the stock too and would like to see their shares go up in price.