A Step-by-Step Guide to Establishing a Share Repurchase Program

Popularly referred to as a “buyback program” a share repurchase scheme is a method companies use to acquire their shares of stock on the open market to reduce their outstanding share count. Such an action is generally seen as a show of management’s confidence and may boost stock prices.

The share repurchase process may bring about a rise in the company’s earnings per share (EPS) and a possible increase in the stock price since it reduces the number of still outstanding shares.

In this detailed article, you’ll learn all you need to know in establishing a Share Buyback Program. We will discuss every significant step of initiating a stock repurchase program, including the financial analysis, board and shareholder authorization, parameters, program execution, and reporting transparency.

Share Repurchase Program

When an organization repurchases shares, it affects its financials in several ways. A company’s purchase of its shares may divert funds from business operations.

When a company purchases back its shares on the open market or from individual shareholders, it engages in a share repurchase program. The company refers to any stock it repurchases as “treasury shares” and it removes them from circulation and deprives them of their voting rights.

Example for share repurchase

The following section will help you understand the basics of share repurchase programs.

What is a share repurchase program?

Why do companies want to repurchase their stocks? Answer is simple because they believe that stock price does not represent their financial strength.

Let’s take the example of a company that earns $10 million in a year and has 100,000 outstanding shares. In this case, the earnings per share (EPS) would be $100. However, if the company buys back 10,000 of its outstanding shares, the total number of outstanding shares reduces to 90,000. As a result, the EPS increased to $111.11, even though the actual earnings have not improved.

Companies may elect to repurchase their shares for several reasons, including but not limited to increasing earnings per share (EPS), improving the capital structure, and returning value to shareholders.

How does the share repurchase program work?

Typically, implementing a share repurchase program includes the following procedures:

• The business has made public its plans to repurchase shares via a tender offer or the open market.
• The corporation determines the maximum number of shares it may repurchase, the length of time it may keep the program in effect, and the highest possible price per share.
• The business finances the acquisition of the units by either drawing on its existing cash reserves or taking out loans at the current price offered under the tender offer or on the market.
• The corporation may reduce the total number of currently circulating shares by repurchasing the stakes and keeping them on hand as treasury stock.
• The business’s financial accounts reflect the effects of the share buyback, including a rise in EPS and possibly an increase in the stock price.

Types of share repurchase programs

The ability to act on repurchases when market circumstances and cash flow dictate is a significant benefit to the corporation. Share buyback plans often fall into one of two categories:

• Open market repurchase – Companies often buy back shares on the open market or through an open market repurchase. Over time, the corporation will repurchase its shares on the open market. Without a predetermined price or quota, the corporation makes opportunistic stock purchases whenever its management team determines it is underpriced.
• Tender offer – The company may repurchase shares through a tender offer, which is a more targeted and time-limited method. This approach makes an open request to current shareholders to repurchase shares at a fixed price. Investors can choose whether or not to participate in the offer. If shareholders offer more shares for sale than the firm plans to buy back, the company may buy the extra shares on a pro-rata basis.

Benefits of the share repurchase program

When a company buys back its stock, it lowers its total assets. It causes profitability indicators like return on assets and return on equity to rise beyond their pre-repurchase levels. If a company maintains its yearly dividend payout at the same level even while the number of outstanding shares declines, dividends paid to each shareholder will increase.

If the company improves profits and dividend distribution overall, it further boosts the dividend growth by reducing the general number of shares outstanding. When a company has a history of consistent dividend payments, investors tend to believe that trend will continue.

A repurchase in such instances may conceal a modest decline in net income. Regardless of the company’s financial health, EPS may climb if share repurchases lower the number of outstanding shares by more than the decline in net income.

When a company has spare cash after paying dividends, it may use that money to buy back shares, increasing the amount of money returned to investors. What is the appropriate payout ratio if the company has a dividend payout ratio of 50% and intends to distribute 75% of profits to shareholders? The corporation returns the remaining 25% via share repurchases and the dividend.

Why do companies initiate a share repurchase program?

There are many different motivations for why businesses could start programs to buy their shares, including the following scenarios:

• Allocation of Capital – When a company sees its stock as cheap, it may elect to repurchase some or all of those shares since doing so is a more efficient use of funds than investing in other areas.
• Extra Cash – Share repurchases might be an excellent method to give shareholders their money back if a corporation has extra cash on hand but few other investment options.
• Finance Management – Companies may use share repurchases as a tool to manage finances and change the capital structure of a business. It is beneficial when the firm has a large cash balance or excessive debt.
• Support for the Stock Price – When the market is volatile, or companies think their shares are cheap, they may choose to repurchase their shares to permit their stock price.
• Return of value – Share repurchases represent a method of returning wealth to shareholders who do not need the company to commit to making regular dividend payments.

A step-by-step guide to establishing share repurchase program

Repurchasing shares effectively allows a company to return capital to its shareholders and signals that management views the stock is undervalued. The buyback of shares lowers the total number of outstanding shares, increasing the value of each remaining share.

Here is a step-by-step breakdown of launching your share repurchase plan for the business.

Step 1- Conducting a Financial Analysis

Establishing a share repurchase program begins with thoroughly examining the company’s financial health, past performance, and prospects.

You should consider the following factors in the analysis:

• Determine how much money is available for the share buyback program by analyzing the company’s cash reserves. Ensuring the organization has enough cash to meet its current and future obligations is crucial.
• Understand the existing amount of debt the firm carries and whether or not it can take on more debt to finance the share repurchase program. Debt levels can impact a corporation’s economic leverage and creditworthiness.
• Consider how repurchasing shares might affect earnings per share (EPS). Verify that the repurchases are consistent with the business’s overall goals and whether or not they will result in a significant boost in EPS.
• Consider the potential impact of share repurchases on the company’s capital structure. Analyze how this may affect the company’s debt-to-equity ratio and its liquidity.
• One should consider long-term growth potential when deciding whether a company’s share repurchases align with its investment goals.
  See that the firm is acting lawfully and within the bounds of any share buyback laws or regulations in its operating country.

Step 2 – Obtaining Board and Shareholder Approval

After completing the financial analysis, getting the green light from the board of executives and, in certain circumstances, shareholders is the next critical step. That means:

• A Proposal Presentation – A detailed proposal should outline the share repurchase program’s justification, goals, and anticipated advantages. Share your thorough risk assessment and financial effect study with the board.
• Transparency – Have honest and open discussions with the board members, addressing any problems or inquiries they may have regarding the program.
• Communication with Shareholders – Getting shareholder permission may be required contingent upon the company’s location and local regulations. Ensure shareholders know the proposed program and how to use their voting rights if necessary.
• Compliance with Laws and Regulations – Check that the intended share repurchase scheme conforms with all rules and regulations, including any limitations or limits on the quantity of shares for purchase.

Step 3- Defining the Parameters of the Program

Following the board’s acceptance of the share buyback program, the next stage is establishing the program’s parameters. It requires deciding on the following:

• Determine the share buyback program’s total number of shares and duration.
• This number should represent the market rate or be higher than the current share price. Fix the price per share the company will pay to repurchase its shares.
• Choose a buyback technique, such as a tender offer or open market repurchases. Depending on the state of the market and the company’s goals, each strategy offers benefits and drawbacks.
• Find out where the money will come from to finance the stock buyback. The firm may utilize cash on hand, issue debt, or mix the two, depending on its current financial health and willingness to take on more risk.
• Ensure that the program provides enough leeway for the timing and execution of share repurchases to adapt to changing market circumstances.

Step 4 – Execution and Implementation

The corporation has established the specifications of the share repurchase program, it may move on to implementing and executing it. They should choose an approved broker or dealer with the expertise, image, and efficiency to handle the company’s share buyback operations.

The business must also watch stock price, trading activity, and market sentiment to determine whether to repurchase shares. The best way to maximize shareholders’ value is to time the repurchases strategically, preferably during recessions or when the share price is low.

Finally, compliance requires a firm commitment to abide by all applicable laws and regulations, especially those about insider trading and related reporting requirements. Compliance during program execution will protect shareholders and the firm.

Step 5 – Reporting and Transparency

The execution and implementation of the share buyback program need complete openness and constant, clear communication. That means:

• Establishing Reporting Systems – Create reporting systems to give frequent information on the developments of the share repurchase program. Stakeholders should disclose the total number of repurchased shares, the overall cost, and the leftover money for future repurchases.
• Shareholder Communication – The company should share the share buyback program’s outcomes with shareholders, explaining how the program will impact earnings per share and contribute to the firm’s long-term strategic objectives.
• Responding to Shareholder issues – Answer any problems or queries that shareholders may have about the program’s implementation. When asked questions, explain honestly and reassure investors about the firm’s financial standing.

Get your valuation done by Experts!

It is essential to establish a share buyback program ,doing a financial analysis, getting board and shareholder permission, showing the boundaries of the program, putting the program into action, and reporting on its results.

Before launching a share repurchase program, businesses should consider their specific situation and long-term strategic objectives. If you want precise and thorough insights about your company’s value, go as far as the professionals at Eqvista.

You can trust our expert advice to help you make intelligent choices and realize your company’s full potential. Give us a ring now to use our valuation services right away!