A stock repurchase program, also called a buyback, is what corporations do to show investors they have confidence to invest in themselves. Usually a buyback is announced in the press in advance or at the time of an earnings release.

Significance

When a company issues a press release that it is considering (or will do) a stock repurchase program, it can rally the stock price. Sometimes the stock can rally just from an investment analyst's suggestion that the company should do a buyback.

Buyback Reasons

Companies announce buybacks for a combination of reasons. Low interest rates, low earnings multiples and strong cash flow are examples that form a solid basis for a company to reinvest in itself.

Benefits

Stock repurchase programs may add shareholder value as well as accelerate company growth if the announcement successfully rallies the stock. The combination of a buyback and a strong earnings report that surpasses analyst estimates can extend a rally in the stock over several days or weeks.

Effects

A huge buyback worth millions of dollars can affect the company's key metrics, such as earnings per share. When a company buys back its own shares, those shares leave the market, which reduces the float size and boosts the value of shares due to reduced supply and increased demand.

Warning

Not all buybacks are successful. If investors or analysts suspect a buyback from a declining or stagnant company is an attempt simply to raise share price, the buyback announcement can backfire and trigger a sell-off, hurting share value.

History

Microsoft announced the biggest buyback in corporate history in September 2008, as shares rallied 4 percent. The stock repurchase program was valued at $40 billion.

Source:

24/7 Wall Street: Apple and a Monster Stock Buyback

The Seattle Times: Microsoft approves $40 billion stock buyback, issuing short-term debt

More Information:

InvestorWords.com

Investopedia.com

RightLine.net