Buyback

A buyback is a transaction in which the issuer itself becomes the buyer of its own shares: it places orders on the exchange or makes a tender offer to all holders at a fixed price. The money leaves the company by the same route as in a distribution of profit, but it is received not by every owner of the stock, only by those who sold.

How a buyback programme works

The decision to buy back shares is taken by the board of directors or the shareholders' meeting, after which a programme is published: the maximum amount, the term and the form. An on-exchange buyback is executed gradually and through a broker, so a large, constant buyer appears in the order book — this narrows the spread and supports the liquidity of the stock for as long as the programme runs.

After that, the fate of the repurchased shares determines the entire economic effect. If they are cancelled, the number of shares outstanding falls for good: the same profit is divided among fewer shares, earnings per share rise, and with an unchanged dividend per share the company's total payout declines. If the shares remain on the balance sheet as treasury stock, they do not vote and do not take part in distributions — but they can be returned to the market, and then the effect is reversed. The source of the money is the same as for a payout: distributable profit and free cash flow, which is why a large programme competes with the dividend policy for one and the same resource.

An example based on the platform's data

A buyback shows up in valuation multiples earlier than in the income statement. Lukoil's price-to-earnings ratio stands at 42,19, and its denominator is earnings per share — a figure that the cancellation of repurchased shares lifts mechanically, without any growth in the company's profit itself. The multiple therefore has to be read together with the change in the share count, otherwise the improvement in valuation looks like the result of the business's performance.

Where buybacks are misunderstood

The main substitution is quasi-treasury shares. When the stock is bought back not by the issuer but by its subsidiary, formally it remains outstanding: the shares vote, fall into the dividend base and receive a payout that flows back inside the group. The number of shares does not decrease in this case, earnings per share do not rise, and the effect comes down to a redistribution of control.

The second case is a buyback funded with borrowed money. Shareholders then get a reduction in equity, while the company gets debt, and the leverage ratio changes more than earnings per share do.