There are times when companies choose to re-acquire the shares of their stocks. Some people refer to this process as a stock buyback. When they re-acquire shares, then they purchase the shares at the current market place and increase the ownership percentage of the stockholders left. These re-acquired shares can be beneficial for value investors.
The Benefits of Re-acquired Shares of Stock
The biggest benefit of this re-acquired shares of stocks is that the investor’s shares will be more valuable. Those shares also represent a bigger percentage of equity within the company.
As we know, earnings per share (EPS) is one of the essential measurements examined by investors before they decide to buy the stocks. In the short term, stock prices will automatically arise once the company announced they will re-acquire the shares.
That is because investors know that the company’s number of shares outstanding will be decreased. Consequently, the company’s EPS increases.
On the other hand, for the companies, re-acquiring shares of its stock help it to replace equity financing with debt financing. That is why mode cost-efficient for them. Other than that, companies also gain benefits from the undervaluation of their shares.
The Potential Drawbacks of Re-acquires Shares of Stock
We all know that investors can have long term profit from re-acquired shares of stock. Yet, it can be harmful if the company pays more than the stock’s worth. Nobody ever recommends management to purchase equity, even in itself, in an overpriced market.
In that situation, the company should choose to put their money into assets that they can easily convert into cash, instead. Those assets can help them repurchase the shares of the company at a discount when the market swings and is trading below the true value.
That way, the company can ensure that the shareholders gain maximum benefit.
