The reason share buybacks are used is that generally a dividend payment is considered to be a permanent fixture and it is a negative look at the company if they stop paying a dividend. Share buybacks are a way to increase the earnings per share on the company (same earnings lower number of shares =>EPS). This is opposed to simply reinvesting the earnings into expanded business operations.
Generally, share buybacks are considered to have a positive influence on stock price because shares are removed from the market so there are fewer shares. Assuming the company earns the same amount of money, earnings per share goes up which makes the stock more attractive.
Econ 101: In every free market, price is determined by supply and demand.
If you increase demand or decrease supply of the number of shares available, price should go up. A share buyback does both.
Could someone translate this for me to dumbed down version for an investing learner?
I am curious how buybacks affect price of stock. I am assuming they make the stock go up, but is there a specific equation that I can use to get a more exact understanding?
In the past year or so, the buyback has been responsible for the company's growth in earnings per share, but it appears that the company is about to turn the corner and offer both actual profit growth in addition to share buybacks due to price increases and volume growth in Eastern Europe, Southeast Asia, and Africa.
