3. What are Share Repurchases (Buybacks)?

In a share repurchase (or buyback) program, a company buys back its own stock from its shareholders and thereby reduces the number of shares outstanding.

Unlike an ordinary dividend payment, where all shareholders receive a cash consideration, the cash distributed in a buyback program only goes to those shareholders who actually sell their shares. The decision about a cash event therefore lies with the shareholders. The shareholders who do not sell see their fractional ownership in the company increase.

 

  • Decision maker: In the U.S. (as well as in Japan and Switzerland), the board of directors decides about share repurchase programs, whereas in Europe, shareholder approval is required.
      
  • Source of funds: Unlike dividends, share repurchases are not paid out of current or past earnings. In many instances, firms engage in buybacks to return excess cash (cash that is not required to support the firm's operating activities and investment policies) to their investors. In fact, some firms even borrow money to repurchase shares (a so-called leveraged buyback).
      
  • Repurchase frequency: Buybacks are much more flexible than dividend payments. Often, the board of directors (or the shareholders' meeting) simply approves a certain volume of shares to be bought back, without specifying the time horizon over which the repurchase program is active. For example, on May 1 2018, Apple announced the authorization of a $100 billion repurchase program. Within the limits of the law, repurchases can then be made at management's discretion and Apple will update the investing public on the buyback program at the end of each quarter.