I read the article and still don't get it...Why does a company buy back shares, and what does it mean to me? So I looked it up on Wikipedia...And this is now what I understand...Basically, it means that the company buys back shares that are outstanding and either retires the stock or keeps it for re-issue later. I learned that when a company has profits, it can either pay out dividends to its shareholders (I knew what dividends were because of being an REI member) or it can buy back stock. By reducing the number of shares out there, the company effectively increases its EPS (earnings per share). This, in turn reduces the P/E. I'm guessing this is good for me, somehow, because it first of all indicates that there are profits, and second of all, the EPS is rising. But I'm still a little confused, so I google further.
I find this on investopedia.com: A Breakdown of Stock Buybacks. What I read here makes sense to me:
You can think of a buyback as a company investing in itself . . . [But] because a company can’t act as its own shareholder, repurchased shares are absorbed by the company, and the number of outstanding shares on the market is reduced. When this happens, the relative ownership stake of each investor increases because there are fewer shares, or claims, on the earnings of the company.
Well, I think this all sounds fine and dandy. I read on.
The article goes on to explain that repurchasing can happen in two ways, a tender offer or an open market buyback. I deduce that Hansen's buyback is an open market buyback, which just means that they buy the outstanding shares at market price.
Reading further, I learn that in addition to rising EPS and lowering P/E, a buyback also will raise ROA (Return on Assets) and ROE (Return on Equity). This makes sense if you think about it. ROA: as cash is used to repurchase stock, this lowers the amount of the company's assets, but the earnings have remained constant. So a smaller numerator over the same denominator = a higher number. ROE: similarly the number of shares outstanding decreases, but earnings are constant, so a smaller numerator over the same denominator = a higher number.
What does this mean? Well, that one motivation for companies to implement a repurchase program could be in order to boost these ratios, to in essence, look better. That seems completely shallow to me.
A second motivation can be for a company to counteract the effects of over-zealous employee stock option plans. This basically has the opposite effect of a buyback by increasing the amount of shares (and therefore affecting all those previously mentioned ratios).
However, there could be a positive motive behind a buyback. Investopedia notes that:
...management many feel the market has discounted its share price too steeply. A stock price can be pummeled by the market for many reasons like weaker-then-expected earnings results, an accounting scandal or just a poor overall economic climate. Thus, when a company spends millions of dollars buying up its own shares, it says management believes that the market has gone too far in discounting the shares - a positive sign.
Now, this sounds spot on. Poor economic climate? Check. Company spending millions of dollars? Check. My conclusion: HANS believes its stock price is too low, and the reaction to this share repurchase should be a higher stock price in the near future. Yay!
Here is the link to the Investopedia article which was written in easy-to-understand terms:
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