Stock Buybacks

Stock Buybacks


Since companies that are traded in the stock market depend on their investors for capital, they are ever sensitive to their investors’ needs and expectations. When a company fails to perform in growth, share prices can stagnate and even drop somewhat. This, for obvious reasons, raises investor concerns. The investor, depending on their commitment and financial safety nets, may decide to dump (sell) the company’s shares, thus creating a situation where stock prices could plummet. This, of course, isn’t in the company’s best interest, so they may intervene by implementing stock buybacks. But what does this mean to the Canadian investor?

First off, the idea of stock buybacks should be explained

If a company finds itself in this situation, the executive may take a portion of their profits and buy their own shares on the market. As an example, if the company had 200,000 shares on the market at $50 per share, they would be considered to have a capitalization of $10,000,000. The investor’s per share ownership of the company would be .0005%. For argument’s sake, let’s say that the company made $2 million dollars in profit for that year. The company executives could take that $2 million and buy 10,000 shares of their own stock. These regained shares are then taken to the board of directors. Through the use of a vote, these shares are destroyed. Therefore the total available shares in the market decreases to 190,000. This absence of shares causes the remaining per share ownership of the company to increase to .000526%. This results in a 26% increase in per share ownership.

This increase has a positive effect on the investment, by giving the investor a greater share in the company in lieu of share price increase. Depending on the company and its future prospects, this can hold off stock dump and keep the investors happy until the next quarterly report.

An example of stock buybacks and how it affects the Canadian investor occurred in the past with CN Rail, and is an excellent example

Canadian National Railway Company, otherwise known as CN Rail to the general public and CNR to traders on the TSX (Toronto Stock Exchange), was reported to have implemented a buy back program of approximately 33 million of their outstanding common shares. CN Rail hoped to have 6.6% of their total shares back by July 2008. Their first phase of the stock buybacks was already in progress as they attempt to secure 5 million shares or a modest 1% of total outstanding common stock shares. CN Rail also planned to compliment this act by using their excess profit to increase common stock dividends.

As you can see, stock buybacks are usually a positive experience for the investor. However, if the company shows little or no indications that it will perform in the future, dividends and increased ownership in the company may not be as attractive. It is in this situation that a good grasp of the market and economic indicators come into play, allowing the investor to make an informed decision as to whether they unload stock to save losses, or hang on for future payoffs.