Why do publicly owned companies buy back their own stocks?
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A company buys up and retires shares of the company on the stock market.
Let’s say there are 100 million share of XYZ Co. The company buys up 10 million of them and retires them. Now there are only 90 million shares outstanding.
But the company still has the same earnings/profits, so their earnings per share increase. And since the company’s growth and prospects, etc. haven’t changed, their P/E (price/earnings) ratio should stay about the same. That means that the price of the shares should increase to reflect that higher P/E.
What companies were doing is taking money that would have previously gone to pay taxes and instead used that money to reduce the number of shares they have outstanding, and that made the remaining shares worth more.
It’s like you had a pizza and cut it into 10 slices, and then replace it with same size pizza cut into only 9 slices — now each slice is about 11% bigger.
If stock price is the value of the company divided by the total shares available, what happens to the stock price when there are less available shares and the same value? That’s why.
Company stock represents control over the company — each share is literally a share of ownership in the issuing company. The more shares are owned by entities who are not the company, the less they own of themselves.
For that reason, a company would seek to buy back its stock to consolidate its own ownership, to stop changes from being made to its structure.
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