Redemption of shares (or buy-back) is a procedure for a company to redeem its own shares on the stock exchange or directly from shareholders.
Let’s see if this is good or bad …
If, after the buyback, the company extinguishes the shares, it artificially creates a shortage of securities on the exchange, moreover, the real value of one share increases (after all, there are fewer of them, but the value of the company’s assets remains the same). Or it may be that the company is buying back shares temporarily, but in any case, dividends on the withdrawn shares are not paid, which means that the rest of the investors should get more. All these factors have a positive effect on demand.
From the above, we can assume that Buyback is awesome what good news for an investor and a trader. But, unfortunately, this is not always the case … Although from a marketing point of view, it is really cool (to attract new investors, if someone does not understand)
I think the reader is aware, but let me remind you that the decision on the amount and the payment of dividends is made by the Board of Directors. Now imagine that you own the company’s shares out of a desire to receive increased dividends, but they turned out to be the same (or even so – the payment of dividends was postponed for some time). And this is after the buyback procedure. There was an obvious reason for the loss of a certain number of investors.
But that’s not all. It so happens that Byback is held by a company whose shares are highly overvalued by the market. And / or the redemption is carried out using credit funds, which increases the debt burden and, consequently, reduces the net asset value. After such actions of the company and simple calculations, the share price may seriously adjust.
Here I would like to once again emphasize the importance of leveling up the skill of performing elementary arithmetic calculations. Numbers will show you a lot more than analysts or a stock chart…
Why is the company buying back its shares?
Basically Buyback is carried out in order to increase demand for their shares. But sometimes this task is secondary, or, more correctly, it is a side effect. You’ve probably heard that many companies pay bonuses to their employees in stocks or options. So, these are the very shares that were bought out from investors. Why do that? To pay less taxes. All the same elementary arithmetic…
It also happens that the company does not know what to do with the accumulated funds, i.e. at the moment she has no directions for development. This can lead to stagnation (stagnation in stock prices). It’s bad for business when money is idle. Byback comes to the rescue.
How to make money on share buybacks
Precisely because the reasons for the buyback of their own shares may not always be positive, it makes no sense to purposefully look for companies that announce Byback. And vice versa … If a company has been on your list for a long time and reports well, an excellent plus in the piggy bank will be the company’s intention to withdraw its shares from circulation.
It is also worth paying attention to whether the company has free funds to carry out this procedure. For a company to go into debt to buy back its shares, it is like for a person to take out a loan to buy a smartphone for himself. This is bad credit as it is not aimed at business development.
If we need a company that plans to buy back shares at its own expense, then we need to pay attention to the cash flow from quarter to quarter. Capital in business is not as agile as that of an individual, so do not rush to draw conclusions from the report for only one quarter.
Of course, money can be saved up for other needs of the company, and sometimes it happens, it is trivial, because the company does not know what to do with it. But in any case, a “good” buyback can be carried out only at the expense of your own funds.
Note one more important detail – shares are not bought in one go. The procedure can take several years. Therefore, investors in such companies can relax and have fun.