Share buybacks, a popular practice among listed corporations, have been met with controversy and debate. Investor Warren Buffett is a big fan of the practice, but it can be seen as market manipulation by some. Companies prioritize keeping their shareholders happy in order to ensure the success of their business. Recently, UBS and ABB announced new share buyback programs worth billions of dollars each.
When a company buys back its own shares, it leads to fewer shares in circulation and a condensation of profit over fewer titles. This can result in higher earnings per share and a higher share price. However, this practice is not unique to Switzerland and is more popular in the US, where it has sparked heated debates. Proponents like Warren Buffett see buybacks as a value-enhancing activity that benefits shareholders while critics like Senator Elizabeth Warren argue that it is market manipulation that enriches insiders.
Share buybacks provide companies with flexibility in returning excess cash to shareholders. They offer advantages over dividends such as timing and tax benefits. Companies may engage in buybacks if they believe their shares are undervalued or if they want to invest in their own company at a discount. However, not all buybacks lead to profit consolidation as some shares acquired through buybacks may be used for purposes other than benefiting shareholders.
Despite their popularity, the volume of share buybacks has fallen by around a third in recent years in Switzerland while the total number of shares destroyed after buybacks decreased in the US meaning that some buybacks result in fictitious reductions in shares. Companies like UBS have also used shares acquired through buybacks as acquisition currency for strategic moves although this can improve shareholder returns but needs careful management to ensure they benefit shareholders long term
