April 2023 – When Companies Buy Back Their Shares and Go Home

It’s never fun when a kid threatens to take their ball and go home. What about when companies do it with their shares of stock?

2023 is shaping up to be a big year for share buybacks, with more than $1 trillion in repurchases expected by the S&P 500 alone. That’s a lot of money and shares changing hands, and a lot of balls being taken home.

But why would a company want to buy back their stock in the first place? After all, it costs money. Sometimes a lot of money – Apple spent $90 billion on share repurchases in 2022. Forbes explains some common reasons, including:

  • Showing confidence that shares are undervalued.
  • Returning unneeded cash to shareholders.
  • Increasing the ownership-share of the remaining shareholders.
  • Offsetting dilution from employee stock option plans by reducing the number of shares outstanding.

The article also describes some of the disadvantages of buying back shares – including that the cash could have been used for research and development, or even to pay a dividend.

Whether you’re a fan or not, stock repurchases happen and business leaders should have a sense of how they work. For an excellent overview of the mechanics of share buybacks, see a post in the aptly-named publication ‘Strategic Finance’ describing two common ways to account for share buybacks: The Retirement Method and The Cost Method. PriSim’s public-company business simulations include one of the two approaches, depending upon the simulation.

Sometimes companies buy back all of their shares and really go home with their ball; that is, they go private. Suspiciously, McKinsey estimates that there were approximately 4,000 public companies listed on US exchanges in 2020, down from an estimated 8,000 in 1996. But rather than signaling the end of the public company as we know it, the National Bureau of Economic Research points out that much of the reduction was likely due to large mergers and acquisitions. And while the number of IPOs is currently in a slump in 2023, it’s expected to pick up as inflation eases and markets stabilize.

And if they do decide to go public, companies will find a smorgasbord of innovative listing options available to them as described in our previous post on direct listings – and a Buffet(t) of stock buyback options once they do.