What is a share buyback?
Here’s how a share buyback works, and what it could mean when a company decides to repurchase its own stock.
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A share buyback, also called a share repurchase or stock buyback, refers to a public company buying its own shares and cancelling them. This reduces the number of shares outstanding. With fewer shares, per-share measures like earnings per share (EPS) and book value per share (BVPS) increase.
A buyback is considered a sign that the stock price is likely to rise. According to the law of supply and demand, if you have the same number of buyers in the market, reducing the supply of shares with a buyback drives the price up.
A buyback is also a positive signal because it reflects the company management’s view that the shares are undervalued. And the fact that the management team is willing to spend the company’s own capital to buy back shares suggests they feel confident about their financial position.
Sometimes, however, a buyback is an effort to shore up a depressed share price. In this case, the company buys its own shares because other buyers are scarce.
Example: “In April 2023, the Canadian government proposed a 2% tax on share buybacks, to encourage corporations to reinvest in their businesses instead of repurchasing their shares.”
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