In the case of a share buyback, a listed company repurchases part of its shares. But what does that mean for investors? t-online will explain it to you.
Usually you sell something without buying it back later. If you sell your car, for example, you have usually thought about it carefully. For example, you are planning to get a new one or switch to a bike or train. Buying back the same car would therefore not be an option.
It looks different with stock corporations. It is often an effective way for them to buy something back – namely their own shares. But why should it do that? How does that work? And what does a share buyback mean for investors?
What is a share buyback?
When it comes to share buybacks, the name says it all: a stock corporation buys back some of the shares it has previously issued from its shareholders. With that the shares are no longer in trade – and can no longer be bought by investors.
There are different reasons for a share buyback (see below). After the shares have been bought back, the stock corporation can use the papers to pay employees or to finance the purchase of another company by means of a share package.
But it can also be that the Shares are “withdrawn”. That means: The shares will be permanently withdrawn from trading, ultimately destroyed.
The corporation has two options to buy back the shares. Either the company acquires the shares directly through the Stock exchange – or it makes the shareholders an appropriate one Repurchase offer.
Why do companies buy back their own shares?
There are various reasons why a stock corporation buys back its own shares. An overview:
- Fear of takeover: The company may be concerned that a competitor in the market will buy enough of its shares that it can take over the company. A share buyback can prevent that.
- Change of the shareholder structure: It is also possible that the company management wants to reduce the number of shareholders in order to increase its influence of investors and shareholders at the general meeting. This applies in particular if the company keeps the shares permanently after the buyback and thus withdraws them from trading.
- Shares as a means of payment: If a listed company wants to take over another company, it can offer it a block of shares instead of money. If it does not have enough shares available, it can buy them back beforehand.
- Share certificates for employees: If the company wants to retain its employees or reward them in particular, it can distribute the repurchased shares to its employees.
- Course maintenance: If a stock corporation buys back the shares and withdraws them, it goes up Price-earnings ratio (P / E) – The same profit is distributed over fewer shares. The P / E ratio is an important share figure. Therefore, a share can appear more attractive to investors after a share buyback.
Good to know: Observers often see no alternative to a share buyback. Because a stock corporation may not have any other ideas about where exactly to put the excess capital, i.e. your money, into.
How does a share buyback work?
Before a stock corporation can buy back the shares, the shareholders must agree to this. On the General meeting give the company one Authorization to buy back shares. This is often done “in advance” – that is, without the companies really wanting to set up a share buyback program.
Either the company now buys the shares directly on the stock exchange – just like you can buy and sell stocks.
However, if there are not enough buying opportunities there, the stock corporation can also give its shareholders one public offer do. The company management then tells them exactly how many shares they want to buy back in what period of time. A Share buyback program often runs over several years.
This public offer to buy back shares is also called “Tender procedureThe offer often includes a bonus in the event that you sell your share. This means that the price that investors receive in a buyback program can be significantly higher than the current price on the stock exchange.
Important: You must be aware that if you buy back shares, you will also lose the rights that you have with a share. For example, you can no longer attend the Annual General Meeting if you sell your shares as part of the buyback program.
What does a share buyback mean for investors?
After a share buyback rises mostly the price of the share. For investors, this means: You can use the opportunity to part with the shares – and possibly make a profit.
But be careful: Investors shouldn’t bet that the share price will rise after buying back the shares – and certainly not that it will remain at this high level.
In addition, if the profit distribution in the form of a dividend remains the same after the shares have been bought back, it will improve Dividend yield – The same dividend applies to fewer shares. However, this only applies if the shares are permanently withdrawn. Read more about the dividend yield here.
Investing in companies that are planning a share buyback is, however only for experienced investors. Beginners shouldn’t rely on such a strategy.
Spread the risk widely with an ETF savings plan
A savings plan is a sensible alternative for you to profit from the stock market. So you can with a ETF savings plan regularly rely on cheap equity funds that replicate an entire stock index. Read more about this here.
With ETFs, investors spread the risk widely across a large number of stocks. In that case, you as an investor may not care if the prices rise or fall temporarily. Because in the long term they will rise anyway, as the past price development shows.