Why do companies repurchase shares?
A company might choose to repurchase shares for many different reasons, but the main reason is that its stock is undervalued, and the company wants to increase demand. Share buybacks reduce the number of shares in circulation, which can increase the share value and the earnings per share (EPS).
To calculate earnings per share, the company’s net income is divided by the number of shares in issue. By reducing the number of shares, EPS will naturally go up. For example, if the company’s net income is $1 million and there are 10,000 shares outstanding, the EPS is $100. But if the company buys back a portion of its shares, the EPS will increase.
Share repurchases can create a positive impression with the public, by assuring them that the company has enough cash to repay its investors. However, it could also create a negative outlook, by encouraging the belief that the organisation doesn’t have any growth potential.