Reasons for Stock Buybacks: Avoiding Takeovers and Alternative

ACC-502 Topic 6 DQ 2 Companies may issue common or preferred stock to generate cash flow. However, sometimes companies will buy back stock that was issued to shareholders. Discuss at least one reason why a company would buy back its own stock and provide an example to support your points. In addition, discuss any potential negative effects of the stock repurchase. Participate in follow-up discussion by changing the fact patterns provided by classmates to show when/why a company may want to reissue its treasury stock. Provide an example to support your points. Hello Dr. Day and class! To acquire capital for its daily operations, the corporation offers shares for sale to the public. It's possible that the offering will be regular stock or preferred shares. Companies issue shares to generate funds. Issuing shares means that the company also issues ownership, which gives shareholders the right to vote (common shares) and the right to receive dividends. There are several reasons a company would buy back its stock, including avoiding a takeover and an alternative to paying dividends. They can also sit on it or reinvest it into the company. Currently the market is more expensive, yet there is higher corporate profitability, which makes it easier for companies to afford the repurchases. In the early days of the pandemic, companies were trying to save money. But in the last 18 months or so, buybacks have made a comeback (Maher, S., 2022). According to studies, investors and analysts use a company's financial decisions as a window into what management really thinks about the company's prospects. The announcement of a share buyback, the argument goes, indicates that managers are so confident of their company's prospects that they believe the best investment it can make is in its own shares (Pettit, J., 2001). Some investors worry about the growing threat of inflation, a potential recession and stagnant share prices. Due to the conflict in Ukraine, JPMorgan could lose about $1 billion on its Russia exposure. According to JP Morgan CEO Jamie Dimon on acquisitions, the bank will be reducing stock buybacks over the next year to meet capital increases required by federal rules "and because we have made some good acquisitions that we believe will enhance the future of our company" (Randewich, N., 2022). Apple Inc. (AAPL) bought back 3.5% for $90 billion in May of 2022 making them the largest company buyback this year (Curry, B., 2022).