1. You are an executive at a Fortune 500 company 

2. That has a lot of cash on hand 

3. You don’t know what to do with it 

4. You talk with your fellow executives 

5. You think and come up with an idea 

6. To use your cash and buy stock back 

7. After some time this increases your companies earnings per a share

8. This all equals a common trick called Buyback! 

Let us break this down, you are a top executive at a Fortune 500 company and your company has a lot of cash on hand that you don’t know what to do with. So you decide to consult your fellow executives and you come with an idea to take your cash and buy the stock back from your shareholders. This is a clever trick in the financial industry. After some time passes your companies earning per a share are up! This all equals something called buyback! 

Banks start buybacks this week 

You may have seen some headlines this week about JPMorgan Chase, Wells Fargo, Citigroup and Bank of America were approved by the Fed to start buying bank shares again. Specifically, JPMorgan Chase announced a $19.4 Billion buyback program that is the largest since 2008. 

Why: The state of the banking economy is healthy; there is a lot of cash that is being held by each of the large banks in America; Now the Fed has stressed test and believes that they can all withstand a financial crisis if it happens. So once the approval came through all the banks share prices rose as they got ready to issue buybacks and dividends to their shareholders. #lastnightgotapprovalnowwebuyback

What is a Buyback? 

This is basically when a company buys their own shares; essentially they are investing in themselves. 

Why Do a Buyback? 

• Way to use excess cash that the company has on hand 

• Way to boost up the share price, and invest in them 

• Buy buying shares they limit the supply of shares in the marketplace, therefore, increasing key metrics like earnings per a share 

• Since cash is an asset, they reduce their assets which then increases your return 

• Think of it this way, if your companies profits are struggling or your stock is getting diluted in the marketplace, you can buy back shares to create an increase in earnings and overall improve the health of your company by the numbers 

How To Do A Buyback?

Open Market: This is done just like how you buy shares, on the open market. They will start buying their own shares back, but often times when a company does this their share price increases, while they are buying their own shares back, sometimes leading to them overpaying for their own shares. 

Tender Offer: The Company will make offers to shareholders to buy back their own stock. They will often do this at a premium and give a range of prices to the shareholder, the shareholder will then in return write an offer back with how many shares and what price they are willing to part with. This is often done at a premium and combined by the company to allow them to get a good average price. 

The Good, The Bad, And The Ugly

• This is a great for shareholders because often this increases the value of the stock, as well as shows a vote of confidence by the company investing in themselves (Good)

• This essentially is a tactic that companies can use to increase their financial ratios that analyst look at to rate their stocks, essentially they are creating an illusion (Bad) 

• When companies are using free cash to buy back their own share, it means they are not using it on R&D or acquisition, depending on the company this could show a lack of growth and innovation for the future, and see that their focus is only on shareholders. (Ugly)