UK Accounting Glossary
A stock repurchase program is initiated by corporations to buy back shares from its shareholders. In a stock repurchase program, the company will take excess cash and trade it for its own stock. After completion of the stock repurchase program, a company can choose to keep the repurchased shares or simply retire the shares. The direct impact of a stock repurchase program is an increased ownership in the company by each shareholder. Reasons for initiating a stock repurchase program are multiple. A stock repurchase program allows a company with excess capital to use its cash to improve its earnings per share (instead of paying out dividends) which provides its shareholders with long-term capital gains potential with a lower tax liability. Another reason companies use a stock repurchase program is when it thinks its share price is undervalued. They may use a stock repurchase program to boost its share price to a less discounted level. By reducing the amount of outstanding shares, a stock repurchase program can also be used to deter hostile takeover. Note that a stock repurchase program is different than a reverse stock split. Although in both cases, the number of outstanding shares is reduced, with a stock repurchase program, the actual value of each share is increased. In contrast, with a reverse stock split, although the share price is increased, unlike with the stock repurchase program, the actual value of the shares does not change. A stock repurchase program can also be called stock repurchase plan or stock buyback.
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This glossary post was last updated: 5th February 2020.