Attractively Priced Share Buyback Stocks

by John Bajkowski

Attractively Priced Share Buyback Stocks Splash image

Corporate managers and directors are responsible for investing a firm’s capital to maximize shareholder value. Companies with excess cash flow need to determine if it’s best used to fund new projects, reduce debt, or return capital to shareholders through dividends or the repurchase of stock (also known as a share buyback). Share buybacks were not common until the early 1980s, but have quickly become widespread. 

Most companies buy back shares by establishing an open market share repurchase program. However, these plans do not obligate a company, and many companies fail to fulfill the repurchase plan completely.

Buybacks benefit stockholders in a number of ways. By decreasing the number of shares outstanding, the earnings per share increase for a given level of income. Shareholders are not subject to the taxes that might be incurred if the company had paid the same money out as cash dividends. Additionally, buyback companies provide shareholders with a margin of support by stepping in and buying shares. Studies have shown that companies repurchasing their shares have subsequently outperformed their benchmarks. The excess return was even stronger for value firms.

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John Bajkowski is president of AAII.


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