Why do companies buy back their own stock?

notme wrote:Companies Buying Their Own Stock

To keep controlling interest in the company and not in someone else's hands.
Another Reason

There is a second reason as well. If they are sitting on cash and think the stock is under-valued, they will invest in their own company. This does two things. First it props up the price by increasing the buy side demand. Second, it provides them the opportunity to enjoy a gain in the exchange when they put those share back into the market at a higher price.
It also helps increase the Earning Per Share EPS, when earnings come out they put them into a per share basis. When companies buy shares they are no longer considered outstanding, so the same amount of money is divided among less shares.

source -http://wiki.answers.com

Share Repurchase Agreement and Stock Buy Back Explained

To those who are familiar with stock dividends or stock splits, a share repurchase agreement is like the opposite. In this case, the company does not give out extra free shares of stock to stockholders (which will become "outstanding" in the market).

Instead, the company buys back stock certificates from some stockholders (not all), so the company instead ends up with less of these in the market being owned by the remaining stockholders. (These are then deposited in the company's treasury, and are not considered part of the "outstanding" certificates).

You may think that this means that each of the certificates should now each have higher value because there will now be less outstanding certificates representing the full value of the company.

Actually, in theory, the answer is "no". Why? Because we assume that when the company buys back these certificates, it pays out its own cash. So now, the overall company is worth less because it has less cash. So yes, each outstanding certificate may now own a bigger percentage of the company, but the company itself is now worth less than before. However, this assumes that the company buys back its own certificates based on the fair value of the company. (In real life, the company will probably buy these back at an amount closer to the market price, which rarely reflects the "fair" value.)

How about earnings? Yes, there will now be fewer shares of stock to take part in the company's earnings. Therefore, each certificate should be earning more than before (increased earnings per share). Shouldn't this increase the value and price?

Again, the answer is "no" for 2 reasons:

1) The company is now in a riskier position because it has less cash. This increased risk makes the company less valuable. Therefore, the increased risk should offset the benefit of increased earnings... which should theoretically keep the certificate's market price the same.

2) This increased earnings per share will only benefit the stockholders if it is paid to the stockholders in the form of cash dividends. However, as suggested in another article by this same author, paying cash dividends will decrease the value of the certificate by the same amount as the dividend payout; so it will have no benefit in the end. So since there's no extra benefit from the increased earnings per share and increased dividends, this should have no impact on the price of the certificate. Moreover, the net present value of your extra future dividends may just be offset by the cash the company loses (which you are entitled to because of your part-ownership of the company) in order to buy back its own certificates.

As can clearly be seen, a share repurchase or stock buy back does not necessarily benefit stockholders.

Again, this is all just in theory and assumes the shares of stock are bought back at their "fair value". In real life, the stock's market price doesn't always follow the fair value or "appropriate" price, so the company won't be able to buy these back at the fair value.

Article Source: http://EzineArticles.com