Trying to understand share buybacks...
I was reading an article about share buybacks recently and it stated that a buyback would lead to shareholders receiving greater earnings per share as the number of outstanding shares has fallen.
I’m sorry if this is a really stupid question but if a company buys back e.g. £100 million of shares wouldn’t the company then own those shares as assets?
Wouldn’t the company’s cash decrease by £100 million through buying the shares and the value of the shares they’ve bought back (as new assets) fluctuate with the share price?
I’m sure that the answer to both those questions is no – but I would be really interested in understanding why that is.
Why would a buyback strengthen a shareholder’s position with the company?
If Mr Smith owns 10% (let’s say 10,000 of the 100,000 shares owned in total by the shareholders) and the company buys back 20,000 shares, I presume it would be said that Mr Smith owns 12.5% of the company and is entitled to a greater share of the profits.
The shareholders own 80,000 shares in total but the company has the other 20,000 so why wouldn’t it be said that Mr Smith still owns 10% because there are 100,000 shares altogether?
Why do the shares that were bought back not count as part of the total?
It almost seems as though the bought back shares vanish into thin air like they no longer exist or count as an asset.
Apologies again if I’m being stupid but I would really like to get my head round this!
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