The repurchase of shares is more advantageous for the company than for the shareholder.
A corporation repurchases shares in the market to redeem them. The purchase is deducted from the company’s balance sheet. In Spain, the maximum limit of treasury stock is 10% of the capital.
This practice, which has been very common in the United States since the mid-1980s, has spread throughout the world. In Spain, the volume of redemptions of shares in 2021 reached 3,300 million euros, according to data from the Madrid stock market. According to the same source, only in the first half of 2022 has this amount doubled to 7,600 million euros.
Unlike dividends, companies buy and amortize treasury stock as shareholder recompense.
provides shareholders with cash and the ability to direct it. The corporation loses a lot of cash in one day, which lowers its value. On dividend payment days, the share price opens at the closing price minus the dividend per share. The dividend is paid on a specific date and easier to track than buyback plans that last months.
In the so-called flexible dividend, the shareholder receives newly issued shares of the company or can sell the rights that correspond to him in the market or to the company itself.
As a return on movable capital, dividends are taxed in savings. In the repurchase and amortization of shares, the shareholder does not receive anything and logically does not pay taxes, so there can be no talk of compensation (“reward or payment of something,” according to the RAE).
The corporation benefits from share purchases and redemptions. However, share purchases reduce the company’s cash loss over time. In poor markets, share repurchases may “defend” share prices.Share buybacks indicate a company’s belief in its cheap stock.
Company stock may be better.Writing down shares raises earnings per share, lowering multiples and making the stock appear cheaper.Because there are fewer shares, earnings per share rises.
If fundamentals and company prospects are poor, the stock will not rise.European telephone firms and banks can verify that treasury stock purchases have not stopped price declines in the recent decade. Its possible positive impact on the share price is a future benefit that may not occur.
Buybacks and redemptions favor controlling shareholders.Reducing the company’s total shares increases their percentage ownership without costing more.Greater engagement may affect future mergers. Treasury share acquisitions should be limited to floating capital because the IBEX restricts large controlling stockholders.Repurchases reduce business liquidity.
Buybacks benefit managers.Managers may obtain better shares if the firm acquires.Buy Treasury shares when share price compensation programs expire to avoid distortion and conflict.Executive share arrangements are non-repurchaseable.
Executives’ short-term interests conflict with the company’s long-term interests, therefore share money is not used to create strategy and business. A new 1% levy on treasury stock purchases in the US encourages “industrial” investment by firms.
In terms of remuneration, it is convenient to be a classic investor. You have to collect cash as soon as possible, and the more, the better.