What is Direct Repurchase
Direct repurchase is the buying of shares in a publicly-traded company by the company itself. A direct repurchase reduces the number of shares outstanding, thereby inflating (positive) earnings per share and, often, the value of the stock. The stock purchased by the company can then be retired or kept as treasury stock, which can be re-issued at a later date.
BREAKING DOWN Direct Repurchase
Direct repurchases are often seen in a very positive light, as such transactions are generally done by companies looking to increase the equity value of their shares. However, just because a company announces the intent to repurchase outstanding shares, does not mean that it will definitely happen.
When management is asked about repurchases, they'll typically say that a buyback is the best use of capital at a particular time. After all, the goal of a firm's management is to maximize return for shareholders and a buyback generally increases shareholder value. The prototypical line in a buyback press release is "we don't see any better investment than in ourselves." Although this can sometimes be the case, this statement is not always true.
Reasons for Direct Repurchases
Nevertheless, there are still sound motives that drive companies to repurchase shares. For example, management may feel the market has discounted its share price too steeply. A stock price can be pummeled by the market for many reasons like weaker-than-expected earnings results, an accounting scandal or just a poor overall economic climate. Thus, when a company spends millions of dollars buying up its own shares, it says management believes that the market has gone too far in discounting the shares — a positive sign.
If a company's motive for initiating a buyback program is sound, the improvement of its financial ratios in the process may just be a byproduct of a good corporate decision. Share buybacks reduce the number of shares outstanding. Once a company purchases its shares, it often cancels them or keeps them as treasury shares, and thus, reduces the number of shares outstanding.
Moreover, buybacks reduce the assets on the balance sheet (remember cash is an asset). As a result, return on assets (ROA) actually increases because assets are reduced; return on equity (ROE) increases because there is less outstanding equity. In general, the market views higher ROA and ROE as positives.
Until 2004, companies did not have to disclose whether they repurchased company stock or not. The SEC now requires that companies divulge their share repurchases for the past quarter in their 10-Q and 10-K filings.
In a June 2018 announcement, Chinese internet company Baidu announced a new $1 billion stock buyback that will take place over the next 12 months. Baidu executives said the repurchases will be funded from the company's existing cash balance. The internet company completed an earlier, $1 billion share buyback plan in 2016.