Expanded Share Buyback

DEFINITION of 'Expanded Share Buyback'

An increase in a company’s existing share repurchase plan. An expanded share buyback is an acceleration of a company’s share repurchase plan, and leads to a faster contraction of its share float. The market impact of an expanded share buyback depends on its magnitude. The greater the amount by which the expanded buyback exceeds the existing repurchase plan, the more positive the market reaction to it. 

BREAKING DOWN 'Expanded Share Buyback'

Although share repurchase and expanded buyback announcements are generally received enthusiastically by investors, skeptics contend that companies would be better off deploying excess cash in more efficient ways, such as investing in research and development or acquiring a rival company. Apart from reducing the number of outstanding shares, an expanded share buyback signals management’s confidence in the company’s future and is construed as a bullish sign by investors. Companies that have little leverage and sound credit ratings may occasionally raise capital at low interest rates and use the proceeds for an expanded share buyback.

For example, Company X with a $2 billion market capitalization may have announced its intention to expend $100 million in share buybacks over the next fiscal year. Six months into the fiscal year, the company may find that cash flows are likely to be substantially higher than its projections. Company X wants to return this excess cash to shareholders, and decides to expand its share buyback by $25 million – or 25% – because of the greater flexibility it has in the timing of this expanded buyback, compared with dividend payments.

Assume Company X had 100 million shares out when it commenced its buyback, with each share trading at $20. Over the course of the year, X may repurchase 4 million shares at an average price of $25 each through its regular buyback, and an additional million shares through the expanded buyback. The company’s outstanding share count would be 95 million at the end of the fiscal year, which means that the share count has decreased by 5% including the expanded buyback, rather than 4% if the buyback had not been expanded.  

 

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