Profitable companies must routinely make decisions on what to do with their profits. The usual choices are capital purchases for the business, payment of dividends, retirement of debt, or repurchase of shares. Repurchasing shares reduces outstanding shares and, other things being equal, results in increased earnings per share.
Companies routinely make their choices based on what offers the best return for their cash. When stock prices are low, a share repurchase becomes more attractive. In a very weak stock market, it is theoretically possible for a company to take itself private by buying up all outstanding shares, but that extreme is rarely achieved.
As dividends are taxable, some consider the repurchase of shares to be more beneficial to the shareholder. Theortically, the stock price should increase, and shareholders can decide when to cash them in, and they pay income taxes at capital gains tax rates.
Related Fool Articles
- Will Stock Buybacks Make You Rich?
- Buybacks Can Predict Profits
- The Skinny on Share Buybacks
- Share Buybacks Aren't All Equal
Recent Mentions on Fool.com
- The World's Best Dividend Portfolio
- 3 Stock Tips You Can't Live Without
- 3 Stocks Near 52-Week Highs Worth Selling
- Could This Company Be Marvell-ous?
- Should I Invest in These 5 FTSE 100 Shares?
- Washington Banking Launches Share Buyback Program