15 Factors To Look When Analyzing Stock Buyback Offer

Factors To Look When Analyzing Stock Buyback Offer Woman investor thinking about her investing strategy after buyback announcement.

All stock buybacks are not beneficial for shareholders. These factors to look when analyzing stock buyback offer can help you a lot.

Stock buyback, also known as share repurchase, is a corporate action in which a company buys its own outstanding shares from existing shareholders. This corporate strategy can quickly generate enough demand of shares of the underlying company.

As a result, the stock price surge immediately along with the announcement. It is mainly due to the positive signal sent by management for stock undervaluation at current price.

According to a post published at AAII, any year-over-year decrease of over 2.5% of outstanding shares should be considered a bullish sign for the company and 5% is very bullish.

Simultaneously, investor’s confidence gets a big boost in all types of market sentiments. But, every stock buyback is not successful enough to generate shareholder’s value.

They can even ruin current shareholder’s value in the long run. Therefore, it is always recommended to evaluate stock buybacks before making any final decision.

Once you analyze all important factors together and not alone, you can perhaps make better decisions at right time. You can easily decide whether to participate in the offer or stay away from it. Here are 15 factors to consider when evaluating impact of shares repurchase offer:

(1) Stock’s Net Buyback Yield

It is one of the most significant factors to look when analyzing stock buyback offer. Stock’s net buyback yield is the total share repurchases minus total share issuance divided by market capitalization of underlying company.

It helps investors to quickly determine the effective or actual size of buyback offer.

For example, if a company is willing to purchase 50 million dollars worth of its stock & its market capitalization stand at 500 million. However, it also issued 30 million new shares in a given financial year. In such a case, its net buyback yield would be 50-30/500 = 4%.

Simultaneously, investors are advised to calculate stock’s net buyback yield for multiple years rather than for a given financial year. It will help you to derive a better picture about the underlying company.

A company that issues more new shares as compared to shares repurchased in a buyback offer will have a negative net buyback yield.

Generally, the higher the percentage of net buyback yield, the greater will be the impact on the share price.

It is mainly due to meaningful appreciation in the earnings per share (EPS) of the underlying company.

Therefore, companies with largest share repurchases are likely to outperform in the stock market in the following year. In such a case, long-term investors are more likely to be benefited by not tendering their shares in buyback offer.

On the other hand, companies bringing smaller share repurchases just to offset some effect of issuing large amounts of new shares have historically underperformed in the market in the following year. In such a case, short-term investors or active traders who tender shares in the offer are likely to be benefited.

Thus, investors are advised to carefully investigate this factor when deciding on the outcome of a stock buyback offer.

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