What Are Stock Buybacks?

Stock buybacks have been in the news a lot recently. In 2018, companies repurchased insane amounts of their stock. But this is hardly a new practice.  Stock buybacks have occurred for decades and are a common tool to provide value to shareholders. In today’s installment of our Financial Education series, we will examine stock buybacks, some pros and cons, and discuss how this impacts dividend investors!

What Are stock buybacks?

A Stock buyback has several common names.  For example, a stock buyback is also referred to as a share repurchase or share buyback.

Fundamentally, a Stock Buyback is transaction that is exactly as the name suggests.  A company decides to purchase their stock from the open market from current shareholders.  In turn, the company’s outstanding shares decrease by the amount of shares repurchased.   A company is required to have Board approval for a specified dollar amount in order to repurchase its shares.  For example, it is common to read in a company’s SEC filings that “the Board has authorized a Share Repurchase program up to $___ Billion of shares.”

This is for the fellow accounting nerds, like us, out there. A repurchase is recorded in an account called “Treasury Stock” on the balance sheet.  Treasury Stock is a contra-equity account.  Thus,  an increase in Treasury Stock will then reduce the balance of equity.  A typical entry debits Treasury Stock and credits Cash. That’s enough detailed accounting for one article.  If you’d like to read more, here is an article discussing this in greater detail.

Stock Buybacks – Pros and Cons

In this section, we will discuss some pros and cons of stock buybacks.  This is not an all-inclusive list; however, we will do our best to bring as much value as we can to this section.

Pros:

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Disclaimer: I do not recommend any decision to the reader or any user, please consult your own research. Thank you.

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