I’m sure everyone has purchased stock here, either through a brokerage account or Fantasy Finance. Funds on Wall Street have also purchased stock multiple times, and foreign investors too. However, did you know that companies can buy their own stock, too?
This happens through the process of a stock buyback. Simply put, companies repurchase their own shares with its cash and cash equivalents, essentially reinvesting. Since they are buying their own stock, the number of outstanding shares, or the amount that a company has issued, goes down. This increases the stake of each investor into the company, including insiders. You may be asking, why would a company buy their own shares? A share buyback often means that the company is confident in themselves, and they feel that their share price is at a discount. Stock buybacks also improve financial ratios such as the P/E ratio and earnings per share, which is also enticing for a company.
The announcement of a buyback usually sends the share price of a stock soaring, which is exactly what happened on Tuesday. AMD, one of the largest semiconductor businesses, unveiled their 4-billion-dollar buyback plan, the first for two decades ago for the company. Like most buybacks, this was going to be funded by cash, and it comes after one of the greatest recoveries in the business world for AMD, led by CEO Lisa Su. Ever since she took the role, she has grown the company into a competitor to Intel, and this growth has allowed for the buyback to occur. AMD could be sensing that their share price is oversold, with the company’s stock down nearly 20 percent from its high. This sent the share price up nearly 5 percent in a matter of minutes, leaving AMD positive on a day where the markets were in a bloodbath.
With economic projections looking promising, many companies are considering buybacks too. April saw 208 million dollars’ worth of stock buybacks from companies, and low interest rates are certainly contributing. Banks will also look forward to regaining the ability to perform buybacks in June, which was shut down last year by the Fed. What do you think about stock buybacks?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.