RE:RE:Fear Not Fellow Shareholders...Buybacks Are Great For Usđź‘Ť The advantages of share buybacks include:
1. Boost EPS: By reducing the number of outstanding shares, share repurchases tend to increase a company’s earnings per share (EPS), a key metric for Wall Street.
2. Signal undervaluation: A share buyback signals to the market that a company believes its stock is undervalued, which can lead to increased investor confidence and a higher stock price.
3. Tax efficiency: Share buybacks are almost tax-free, except for a 1% excise tax imposed by the Inflation Reduction Act of 2022. This makes them a more tax-efficient way for companies to return capital to shareholders compared to dividend payments.
4. Cutting buybacks may be preferable to reducing dividends: In tough economic times, companies may eliminate or decrease dividends to conserve cash. However, cutting dividends can signal financial struggles and negatively impact the stock price. Share buybacks, on the other hand, do not carry the same stigma.
5. Reduce dilution: Share buybacks can help manage and maintain the share count by reducing the number of outstanding shares, which can mitigate the dilutive effects of employee stock options and other equity-based compensation.
6. Increase shareholder value: Properly executed share buybacks can increase shareholder value by reducing the number of shares outstanding and increasing the value of each remaining share.
7. Create a favorable attitude towards shareholders: Share buybacks demonstrate a company’s commitment to creating value for its shareholders, which can lead to increased investor confidence and loyalty.
8. Allow companies to take advantage of dollar-cost averaging: Companies can use share buybacks to take advantage of dollar-cost averaging, buying back shares at lower prices and reducing their average cost per share.
9. Provide a means to hide stock dilution: Companies can use share buybacks to mask the dilutive effects of issuing new stock for executive or manager compensation, maintaining a steady share count.
10. Diversification opportunities: Investors can diversify their portfolios by investing in exchange-traded funds (ETFs) or funds that track companies with share buyback programs, such as the Invesco Buyback Achievers Portfolio ETF (PKW).
Overall, share buybacks can be a valuable tool for companies to create value for their shareholders, increase investor confidence, and demonstrate their commitment to shareholder returns.