Shares Buyback

Microsoft, HP, Nike in shares buyback

-The Business Times, 24th Sept

It's rare i read something in business times that i understand, so here's one to recap what i learnt in FA. What is shares buyback and why do companies engage in shares buyback?

Basically it means companies are buying back shares that are publicly available in the market. This reduces the number of shares that investors like me and you can purchase. There can be a couple of reasons why companies chooses to do so. Shares buyback increases the earnings per share of the company, a ratio that is commonly used by investors to guage how attractive the stock is. Alternatively, the guys at Nike may be thinking that their shares are so undervalued in this current market turmoil that they better buy some for themselves cos the share price will increase in the future. Again, investors may deem this move as a vote of confidence by the company itself, and may also move to increase their portfolio of Nike shares.

However, you dont buy something with nothing. The company buys with CASH. And like what JinWen said, in this current market situation, the best move may be to hold cash. Cash is king now, if you believe him. Specifically, cash that can otherwise be plowed back to generate additional profits have now been used to buy back shares. I doubt Warren Buffet will do such a thing. It is the same as giving out dividends. Basically you are telling your shareholders that look, this $1 i earned im going to return to you. But Buffet believes that you not not maximizing shareholders interest in so doing. If your business is truly profitable and can generate greater revenue in the future, it doesnt make sense to give away $1 which can be plowed back to generate many more $1 in the future.

So you gonna really examine the company's motives in each a move.