There may be several reasons why a company opts for a stock buyback. However, the list below highlights the most common reasons for the same.

When There Is Excess Cash but Not Enough Projects to Invest In

Companies issue shares to raise equity capital and expand their venture, but often such a practice does not prove to be of much use. Similarly, keeping excess money at the bank is more like a truncated cash flow offering liquidity over the ideal requirement. Hence, instead of piling on cash reserves, companies with robust financial standing tend to make the best possible use of the cash available through a stock buyback.

It is a Tax-effective Rewarding Option

When compared to dividends, share buybacks are more tax-effective for both companies and their shareholders. To elaborate, stock buybacks are subjected only to DDT, and the amount of money is deducted before distributing the earnings to the surrendering shareholders. On the other hand, dividends are taxed at 3 different levels.

To Consolidate Hold Over the Company

Often when the number of shareholders of a company exceeds the manageable limit, it becomes challenging for the entity to reach a decision unanimously. Additionally, it may result in a power struggle within the company and among the shareholders with voting rights. To avoid or aggravate such situations, company board members often resort to share buybacks and plan to consolidate their hold over the company by increasing their voting rights.

For instance, OYO Rooms’ attempt to repurchase shares worth $1.5 billion from Lightspeed and Sequoia Capital is one of the most recent examples of buyback of shares in 2020. The success of such a proposal would increase the company CEO’s current shareholding from a meager 10% to 30% and strengthen his hold over the company.

To Signal that the Stock Is Undervalued

When a company decides to buy back its shares, it may also indicate that the company considers its shares to be undervalued. Besides serving as a remedy for the situation, it also helps to project a positive picture of the company’s prospects and its current valuation.

Other than these, stock buybacks may be prompted to improve companies’ overall valuation or to reward their existing shareholders.