When a company has more cash than it needs, it has a few choices. It can invest in new products, buy another business, pay a dividend to its shareholders or buy back some of its own shares. Buybacks have become one of the most popular options, and one of the most argued about. Here is what they are, why companies do them and what to look for.
How a buyback works
A company's ownership is divided into shares. If a company has 100 million shares and you own one million, you own 1% of it. In a buyback, the company uses its cash to buy some of its own shares on the stock market, and then usually cancels them.
After a buyback of 10 million shares, only 90 million remain. You still own one million, but that is now about 1.1% of the company. You own a slightly bigger slice without spending anything.
A buyback is a dividend you choose not to take, reinvested in the one company you already know.
Marco Bellini
