The company uses its own cash to buy its shares from the market and retire them. Fewer shares remain, so each one represents a slightly larger claim on the same business — the mirror image of the dilution an offering creates.
An offering creates shares and takes in cash. A buyback spends cash and removes shares. One dilutes existing holders, the other concentrates them.
Nothing about the underlying business changes in either case. What changes is how many claims exist on it.
Because profit is divided by a smaller number of shares, earnings per share rises even if total profit is flat. This flatters per-share growth without the company having earned more.
It is worth separating the two when reading results: profit growth and share-count reduction are different things, and only one reflects the business improving.
Most announcements are authorisations — board permission to buy up to a certain amount over a period. They are not commitments, and companies often do not use the full amount.
The distinction matters because the announcement and the actual buying can be far apart in time, or the buying may never happen.
Buybacks are funded from cash the company could otherwise invest, hold, or pay out as dividends. Whether that is a good use of it depends on what else was available.
Companies also tend to buy more when profits and prices are high, which is not when shares are cheapest — a common criticism of the practice.
One question, no account: what did you come here for, and did you find it? A person reads these, and they shape what gets written next.
From StockMotive — the honest why behind every market move. Educational information only, not investment advice.