As Congress weighs lending help to some publicly traded companies, critics want those corporations to be banned from ever conducting stock buybacks again.
So exactly what is a stock buyback and why all the fuss?
Here’s the deal: First, when a corporation buys back its stock, the move reduces the number of shares that trade publicly.
“The company either buys them on the open market or directly makes an offer to shareholders,” explained certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York.
An empty check-in area is seen at the United Airlines domestic check-in area at San Francisco International Airport in San Francisco, on Thursday, March. 5, 2020.
David Paul Morris | Bloomberg | Getty Images
The upshot is that the buyback can push the per-share price higher, because some common metrics used to evaluate a stock price are spread across fewer shares, making the stock look more attractive.
“The company has the same earnings but fewer shares outstanding,” Boneparth said.
Stock buybacks have been a common practice over the last several years, with companies looking to return value to shareholders in ways other than paying dividends.
