Reasons for Buyback
The decision to implement a share buyback is backed by several strategic, financial, and market considerations. Some common reasons for buyback are,
1. Capital Structure Optimization: A company may optimize its capital structure through a buyback program. A buyback reduces the number of outstanding shares that in return increases the value of shares, Earning per Share (EPS), and Return on Equity (ROE).
2. Undervaluation of Stock: A buyback program presents a company’s opinion that its shares are undervalued in the market. As a solution to this, buyback is executed to reflect the strong financial position and current valuation of a company. A buyback adds to the market reputation and increases the market valuation of a company which increases the value of the remaining shareholders.
3. Excess Cash Reserves: A company with huge cash reserves and fewer investment opportunities may look forward to buyback. Excess cash kept in an account hurts cash flow, so the company efficiently deploys surplus funds through a stock buyback.
4. Rewarding Shareholders: A buyback is looked at as an attractive option to reward the shareholders in case of significant cash flows. A company can distribute value to investors by returning cash to its shareholders through buyback.
5. Tax-Efficient: The shareholders prefer buyback of stock instead of huge dividends as it can be tax efficient. The shareholders can claim exemptions and tax treatment under the capital gain head.
6. Restraining Power and Control: A company may also implement buyback to restrain the control of management and prevent dilution of control. This helps in quick and efficient decision-making without much conflict.
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