Or…it could share this excess cash with shareholders. Reward them for their patience. It can do this through something called a share buyback. Basically, it offers cash to shareholders in return for a portion of their shares. Let’s say a stock is trading at $100. The company tells investors, “Okay, I’ll pay 20% extra. Give me your shares and I’ll give you cash.” (View Highlight)
The premium over the market price entices investors to sell. And the gains they make on the sale are either tax-free or only incur a minimal tax charge. Depending on which part of the world they live in. The company puts its excess cash to use. Shareholders make gains. Everyone’s happy. (View Highlight)
Their contention is simple. Stocks are usually owned by the wealthy. The wealthiest 10% in America own 89% of all stocks. And when buybacks boost the stock price, it’s this select set of people who win. (View Highlight)
When a company pays a higher sum of money to buy its shares, that can create confidence in the minds of investors. They think, “Hey, if the company believes it’s undervalued and it is using its cash to buy stock, it must know something we don’t.” When people rush to buy the stock, it bumps up the stock price. It creates a temporary sugar high for the stock. (View Highlight)
They say that the popular perception that companies are not investing in projects that have long-term benefits is wrong. For instance, in 2018, buybacks hit a record high of nearly $1 trillion . But companies had also increased the monies they’d invested in long-term projects by 16%. What we call capital expenditure (capex) . These are projects that provide employment opportunities. So they’re putting cash to use. (View Highlight)
