You hear it on financial television or read it in the paper all the time: Company XYZ issues a huge stock buyback program. Conventional wisdom says buybacks are sign that the company itself thinks its stock is cheap. In theory, this would be the ultimate "inside information." The reality is quite different.
In this edition of Investing 101, Greg Milano, co-founder & CEO of Fortuna Advisors, a company specializing in shareholder value consulting, walks us through some of the basics on stock buybacks and sheds light on whether or not they're a reliable signal to buy shares alongside the company itself.
What's a Buyback?
Simply enough, Milano says a buyback is just the "act of a company taking some of its cash or some money it might borrow, and buying some of its own shares."
Significantly, an actual buyback versus one that's just announced, are different things. Often times a company will set a buyback policy of bidding for a stock under the current prices. It's a way for the board of directors to start buying its own shares when the stock price dips.
Why Would a Public Company Buy Its Own Shares?
It's not as silly a question as it may seem. Being public means selling a portion of the company to raise cash; usually for the purposes of cashing out insiders and investing in corporate opportunities. Selling shares to the public then buying them back sounds dangerously close to trading your own shares.Read More »from Stock Buybacks: Separating Fact From Fiction