I was told by my Financial Advisor that one of the companies I own is buying back their own stock. How will this affect my shares?
Company share buybacks have become more and more popular as of late. The main reason is most likely lower interest rates. Companies with high cash flow need to invest the money and many times the best investment they can make for the company and its shareholders is its own stock. As a company buys its’ shares back the amount of shares outstanding shrinks and makes the shares more valuable. This is why when companies announce share buybacks the price of the stock goes up. When a company decides to buy back shares it normally happens two ways. The first would be a tender offer to current shareholders to buy their shares back at a premium above the current price. The other method is to just go into the open market and purchase the stock. As the share count decreases this should make the company’s financial ratios look better. Earnings per share should increase just by the fact that fewer shares are outstanding. It is important to note that there are some instances where share buybacks may not help the share price. These examples would be companies whose earnings have been eroding. The share buybacks can also help disguise a company that has an excessive dilution of its company shares through secondary offerings and employee stock options. However, more times than not the company’s buying back shares can be a great investment. You do need to research further than that before investing only based on a buyback plan, but for the most part, this is a positive indicator.