Share buyback

A company purchasing its own shares in the market and cancelling them, so that the same earnings are divided among fewer shares and each remaining holder owns a larger proportion.

Example

Spending 200m at 50 per share retires 4 million shares; 500m of profit across 196 million shares raises earnings per share from 2.50 to 2.5510.

Important

A buyback is only good for you if the shares were bought below what they are worth. The company is an investor in its own stock, and the price it paid is the whole question.

Related terms

• Dividend — A distribution of cash (occasionally shares) from a company to its shareholders, declared at the discretion of the board out of the company's available profits.
• Earnings per share — Net profit divided by the number of shares outstanding - the portion of a company's profit attributable to each share.
• Shares outstanding — The number of shares a company has issued and that are currently held by investors. The diluted figure adds shares that would exist if outstanding options and convertible instruments were exercised.
• Payout ratio — The share of earnings paid out as dividends. What remains is retained and reinvested in the business.

Lessons that explain it

• Where an equity return comes from: cash paid out, and cash kept in — Two sources, one pool. A company either hands you cash or reinvests it on your behalf - and a company that reinvests is not withholding your return. (11 min)

All 578 terms in the Investing glossary