Question

Why are share repurchases considered a "return of capital" to shareholders?

Answer 1

Share repurchase are form of return on capital for different share holders as it focuses on buying share from existing marketplace and from existing shareholders at a price which is higher than the prevalent market price so that majority of the shareholders can tender their shares in the offer and they can gain through appreciation of their capital and they can earn capital gain.

This is a common practice which is adopted by lots of companies to buy shares from the market in order to make their shareholders gain through appreciation in their share price and it also give an indication to the shareholders that management is bullish on the overall prospect of the company and they see that is still better to acquire the shares from the market place and it will provide them with return excess Cash to shareholders.

It also sends a strong signal as the company does not want to to have its shareholders get taxed through dividend and dividend are not tax deductible but through share repurchases they can have some tax benefit also . since shares are purchased a much higher price than the prevalent market price in the buying price of the shareholders, it is often a signal of returning back the cash to the shareholders by buying their existing shares market

It can help us company through reducing off its excess capital outstanding and it can also gain through temporary undervaluation in its share price and it also helps them to pay out their excessive cash to the shareholders without directly getting taxed through the payment window of dividend.

share repurchase will have a positive effect on Earning per share as the number of shareholders gets reduced and the earnings looks inflated and that will help the share to gain further momentum in future as the share gets undervalued on the front of profits to earnings ratio.