(10) Absence Of Profitable Growth Opportunities
It is one of the most popular motives of a company behind share repurchase program. Growth opportunities are not constant in all types of industries or sectors.
These are likely to change with time along with rising or falling competition. When companies find profitable growth opportunities at attractive valuations then they rush to buy them.
On the other hand, when growth opportunities are limited, or not profitable, or present at high cost then they prefer to stay away from further investments.
Similarly, when management doesn’t have ideas to utilize the surplus money then also they prefer to stay away from further investments.
Therefore, in absence of potential growth opportunities or innovative ideas, holding on to all unused equity funding means sharing ownership for no reason. In these situations, underlying company usually prefer to go for share buyback program.
Additionally, when little headroom is left for expansion for a dominating company then also carrying larger amount of equity capital on balance sheet makes no sense. It perhaps becomes more of a burden rather than blessings.
Thus, share buyback strategy helps them to reduce burden of shareholders by reinvesting in their own company.
(11) Providing A Quick Way To Boost EPS & Other Financial Ratios
It is one of the most critical motives of a company behind share repurchase program. Stock buyback allows companies to repurchase their own outstanding shares.
This activity helps them to reduce the number of outstanding shares from the market. Once the stock buyback offer is completed, it tends to reduce the capital base of the underlying company.
As a result, earnings per share (EPS) get boosted quickly provided profits remains the same. Simultaneously, the various other financial ratios such as return on assets (ROA), return on equity (ROE) & return on net worth also gets boosted.
These financial ratios are often used as performance parameters to analyze the profitability of an underlying company. Once these financial ratios are improved after completion of buyback offer, underlying company starts appearing financially healthy.
A fundamentally strong company with attractive financial ratios is usually more attractive to investors. Thus, share buyback will enhance long-term shareholder value, if profit is maintained the same or higher.
- Reasons Behind Company’s Buyback Offer: Shutterstock