Explained: 8 reasons why companies do share buybacks and what it means to investors

Infosys’ board meeting on Thursday to consider a share buyback proposal has infused fresh life into the stock, which has rallied 7% in the past two sessions. As the buzz builds, ET Markets explains why companies do share buybacks and what it means for investors:

Companies buy back their shares either through open markets or via the tender route for various reasons. Here are eight common ones:

Enhance shareholder value

By reducing the number of outstanding shares, earnings per share (EPS) rises. This often boosts the stock price and signals confidence to the market.

Return excess cash to shareholders

Companies sometimes distribute surplus cash through buybacks. This method is tax-efficient and benefits only participating shareholders, unlike dividends, which are distributed to all. It is especially popular in markets with high dividend distribution tax.

Signal of undervaluation

Management may initiate a buyback if it believes the stock is undervalued. It signals confidence in the company’s growth and fundamentals.

Stabilise stock price

Buybacks provide support in volatile or weak markets, boosting investor sentiment.

Offset dilution from ESOPs

Companies issuing large numbers of employee stock options (ESOPs) often use buybacks to prevent excessive dilution of existing shareholders’ stakes.

Defend against hostile takeovers

By reducing the free float, buybacks make it harder for an acquirer to accumulate a controlling stake.

Flexibility versus dividends

Unlike dividends, buybacks are one-time events, giving companies flexibility to manage cash without committing to recurring payouts.

Regulatory or tax arbitrage

In some cases, tax treatment makes buybacks more attractive than dividends. In India, since 2019, the tax on buybacks shifted to the company instead of shareholders, making it beneficial for investors.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)