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How do I as an individual investor benefit from this?

In general terms, a stock buyback means that the company will quietly buy its own stock off the open market. Once the stock is owned by the company again, that reduces the total number of shares available. Since many important measures of the company's value are reported as "per share" (especially Earnings Per Share, or EPS), reducing the denominator in all of those ratios makes the per share value rise. So the shares you own are, in theory, more valuable as they now represent a larger piece of the pie.

A very simplified example:

Company ABC has 1000 shares available on the open market. Each share is currently selling for $100/share. I buy 10 shares ($1000 worth).

ABC had $5000 in net profit last quarter. This means Earnings Per Share (EPS) was $5 share ($5000/1000 shares), giving them a Price/Earnings ratio (P/E) of 20 ($100/$5). Wall Street analysts feel that 20 is a fair P/E level for this company, so the share price is pretty stable.

ABC then institutes a buy-back plan, and over the next 3 months, they buy back 10% of their outstanding shares. Now there are only 900 shares available on the open market, and I still own 10 of them.

ABC again earns a net profit of $5000. But now, with fewer shares, EPS rises to %5.55/share ($5000/900). If the share price is still around $100, that makes the P/E lower, at 18 now ($100/$5.55). Wall Street analysts still believe that 20 was a good P/E level for this company, so they now see ABC at $100 with a P/E of 18 as undervalued, and will start buying more ABC until the price is bid up to around $111 ($111/$5.55 = P/E of 20 again).

Now that the ABC shares are worth $111, my 10 shares are worth $1,110, giving me a $110 capital gains profit if I choose to sell.

In theory, at least. It doesn't work perfectly like that. But that's the general idea. There are many different opinions about whether or not this is a better or worse use of the company's money compared to paying dividends, making corporate acquisitions, or reinvesting in R&D, equipment, etc. as ways to increase shareholder value.

Mike
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