Why Does a Company Repurchase Stock?

by Mike Parker

Companies may issue stock for a variety of reasons, including the need to raise capital for operating expenses, research and development or expansion. Occasionally a company's board of directors may decide to repurchase some of its shares of stock from the open market.

Earnings Per Share

One of the basic economic indicators of a company's financial health is its earnings per share, or EPS. In its simplest form, earnings per share is determined by dividing the company's earnings by the number of its outstanding shares of stock. A company may wish to increase its EPS to make the stock more attractive to investors. It can accomplish this by repurchasing shares of stock from the open market, thereby reducing the number of shares by which the company's earnings are divided by.

Stock Options

Employees who also have an ownership stake in a company may have greater incentive to perform at higher levels. A company may provide its employees with ownership opportunities through an employee stock option program. The company may repurchase shares of its stock to fund its employee stock option program.

Price Support

Stock price is determined in part by the company's earnings per share, the value of its assets, and perceived growth or decline. Stock price can also be significantly influenced by investor emotions. If the market perceives a company's value to be low it may spark excess selling which can drive the stock price down. The company's board of directors may repurchase shares of its stock in the open market in an effort to balance supply and demand, and thus support the price of the stock at levels deemed acceptable by the board.

Cash Flush

A company may have significant cash on hand that it wishes to invest. If the board of directors does not feel the time is right to invest in company expansion or capital equipment, it may decide the best use of those funds is to repurchase shares of its own stock. This can result in stronger share prices and higher earnings per share. The company may also be able to resell those shares at a higher price if the market rebounds at a future date.

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