AAPL , with its hoard of cash, has been repurchasing shares of its stock as a means of trying to boost its share price and provide shareholder value. This may also be seen as a sign by some that the tech giant views the potential return on its own stock as a better investment for this money than reinvesting back into the business. The returns to shareholders have been outstanding. For related reading, see: Are Buybacks Always Good for Shareholders?

For corporations with extra cash, there are essentially four choices as to what to do with the extra money. The firm can make capital expenditures or invest in other ways into their existing business; they can pay cash dividends to the shareholders; they can acquire another company or business unit; they can use the money to buy back their own shares. Increasingly in recent years many firms have elected to use a growing percentage of excess cash to repurchase their own shares in the open market.

For the first three quarters of , stock buybacks by U. The theory behind share buybacks is that they reduce the number of shares available in the market and, all things being equal, they will increase earnings per share on the remaining shares, benefiting shareholders.

As cited in a recent story in the Wall Street Journal, companies including Microsoft Corp. MSFT and Pfizer Inc. PFE have used buybacks to increase their reported earnings per share in the most recent quarter.

Buybacks can serve to increase share prices by simply reducing the supply of available shares in the market place.

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Stocks trade in part based upon supply and demand, and a lower supply can cause the price to be bid higher in some cases. For years it was thought that stock buybacks were a positive thing for shareholders. However there are some downsides to buybacks as well:. It can be hard to argue with this logic. Why Are Stock Buybacks So Controversial? Dividends are the most common way that companies distribute cash that doesn't get invested back into the business back to their shareholders.

In terms of being a vehicle to distribute excess cash, dividends are paid to all shareholders on per-share basis. They are paid at a set, declared time. Once a dividend is declared, payment almost always occurs unless some extraordinary event occurs. Thus, dividends are very transparent and public.

Buybacks do benefit all shareholders to the extent that they help increase the price of the stock. Those that sell their shares in the open market or directly back to the company will see a tangible benefit. Other shareholders who do not sell their shares now may see the price drop and not realize the benefit when they ultimately sell their shares at some point in the future.

Even when companies announce a buyback program for their stock, the entire amount announced may not actually be spent. Critics of buybacks have suggested that they are often used to mask the impact of lucrative stock compensation programs for executives. A contrarian example, International Business Machines Corp. It would seem that a company buying back its own stock is a good thing in that it takes shares out of circulation and may boost the earnings per share and stock price for the remaining shares.

In recent years, though, the actual value of stock buybacks has come into question. Some experts contend that buybacks at current high market levels cause the company to overpay for the stock and are carried out to placate large shareholders. For clients who invest in individual stocks, a financial advisor who is knowledgeable in this area can help analyze the longer term prospects of a given stock and can look beyond such short-term corporate actions to realize the actual value of the firm as a part of an investment portfolio.

Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A Good Thing or Not? By Roger Wohlner December 14, — 9: One of Four Choices For corporations with extra cash, there are essentially four choices as to what to do with the extra money.

Benefits of Share Buybacks The theory behind share buybacks is that they reduce the number of shares available in the market and, all things being equal, they will increase earnings per share on the remaining shares, benefiting shareholders.

Companies that buy back their own shares: Often believe that the stock is undervalued and is a good buy at the current market price. Current shareholders may look view this as a sign of confidence by the company in its own future prospects. Often believe that it will create a level of support for the stock, say during a recessionary period or during a market correction , which benefits shareholders. Often believe that buybacks can reduce the number of shares available and increase earnings per share as mentioned above.

Some Buyback Cons For years it was thought that stock buybacks were a positive thing for shareholders.

However there are some downsides to buybacks as well: Some have said that companies will use buybacks as a way to allow executives to take advantage of stock option programs while not diluting earnings per share. Buybacks can create a short-term bump in the stock price that some say allows insiders to profit while other investors might buy in after they see the price move higher.

Moreover, a longer-term benefit has not been tied to share buybacks. From a financial perspective, buybacks benefit investors by improving shareholder value, increasing share prices, and creating tax beneficial opportunities.

Find out the story behind company stock buyback programs and how some of the larger stock buybacks of have fared for shareholders. Buying back shares can be a sensible way for companies to use extra cash. But in many cases, it's just a ploy to boost earnings. Stock buyback programs aren't always done with the interests of shareholders in mind. It's important to try to understand the motivation behind such moves. Find out what these company programs achieve and what it means for stockholders.

Stock buyback refers to publicly traded companies buying back their shares from shareholders. Why would they do that? Buybacks have helped drive stocks higher since and have accelerated in Is this still good news for investors? Learn the motivations behind share repurchase programs, including how they can mask slowing organic growth and why many companies buy their shares high and sell low. Companies are repurchasing their own shares at a rate not seen in nearly a decade, prompting observers to fret that demand for equities is not as strong as the past six weeks' rally would suggest.

Learn about stock buybacks and what they can mean about a company's financial health depending on the motivation behind their Understand the nature of stock buybacks and why many investors and analysts consider them to be controversial despite their Learn about how companies use stock buybacks in order to facilitate executive compensation and why the practice is very controversial.

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Learn about what types of businesses typically execute stock buybacks and what this maneuver can indicated about a business' An odd-lot buyback occurs when a company offers to purchase shares of its stock back from people who hold less than shares.

Learn about the effect of stock buybacks on the economy. Stock buybacks lead to rising stock prices as the supply of stock An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. A period of time in which all factors of production and costs are variable.

In the long run, firms are able to adjust all A legal agreement created by the courts between two parties who did not have a previous obligation to each other. A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over No thanks, I prefer not making money.

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