Share buyback

Updated 01.09.2023

 

Why companies buy back their own shares

— Companies whose shares are traded on the stock exchange can distribute profits to shareholders in this way, it is like paying out dividends, only in this case the shareholders do not receive money, but acquire the right to a larger share of the company’s assets and future profits. Such stock buybacks are similar to reinvesting money without paying the money.

— When paying dividends, you need to pay income tax, but when you buy your own shares, there are no taxes, so this method has a significant advantage.

— Companies can buy back their shares in order to give them to their employees as a motivational tool.

— Private companies can use share buybacks to buy back shares from shareholders who want to exit. If the exiting shareholder’s shares are purchased by the company itself, then the exiting shareholder sells the shares and the remaining shareholders gain a larger share of the company’s assets and future profits without investing personal funds.

 

What is the impact of buying own shares

— The number of shares and, accordingly, the authorized capital decreases.

— The company’s assets decrease because the company spends money to buy shares that it later cancels.

— The number of shareholders decreases, so the company’s assets and future profits accrue to a smaller number of shareholders.

— The price of a publicly traded stock has a tendency to rise, as a decrease in the number of shares results in more profit per share, and in addition, the P/E and return on equity ratios improve.

— The liquidity ratio deteriorates because the company spends money while the liabilities remain the same.

 

Legal restrictions in Lithuania

— The total nominal value of the company’s owned and/or purchased own shares cannot exceed 1/10 of the authorized capital.

— The company cannot buyback its shares if its own capital becomes less than the amount of the authorized capital, the mandatory reserve and the reserve for the purchase of its own shares, therefore the decision to buy back its own shares affects the payment of dividends.

— After the company has boughtback its shares, it will not have the right to use the property and non-property rights provided by them, e.g. the company cannot distribute dividends to itself, purchased shares will not be able to participate in voting.

 

 

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