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Share Buybacks: Good or Bad?

Jarrett McKay - Feb 27, 2017
In today’s environment of historically low interest rates and low returns on cash investments, some companies have found that share buybacks/repurchases have been a good use of excess cash.

In today’s environment of historically low interest rates and low returns on cash investments, some companies have found that share buybacks/repurchases have been a good use of excess cash.

 

Are share buybacks good or bad for investors? There are differing viewpoints.

 

Share repurchases may reduce the overall shares that are outstanding in a company, usually resulting in a greater proportionate stake in the company for those investors who retain their shares. This means that the company’s earnings per share metric may generally increase following a buyback.

 

Compared to other methods of distributing cash such as dividend pay-outs, share buybacks may be more tax-efficient for investors. In most cases, repurchases do not trigger a taxable event for continuing shareholders, unlike dividends which are taxable in the year that they are paid to the investor (although taxes on dividends paid by Canadian corporations are somewhat minimized by the dividend tax credit).

 

However, dividends may result in immediate liquidity since they are paid directly to the investor, whereas increased share value is only realized when shares are sold.

 

Yet, some criticize share buybacks as being negative for investors because companies that purchase their own shares are foregoing capital that could have been spent on productive activity that would potentially raise profits and improve shareholder value.

 

In some cases, a company may overpay for its share repurchase. There have also been instances where companies issue new shares or options to employees at the same time of the share repurchase which results in no increase in value to outside investors.

 

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