Benefits
One incentive for a stock buyback program is to repurchase shares that have fallen out of the hands of the majority owners. For instance, your central leadership team may want to gain (or regain) control of their business, whether from less active shareholders or exiting owners. By repurchasing shares, you are reducing your outstanding shares and the number of people you have to answer to. This, in turn, also increases earnings per share.
For selling shareholders, a stock buyback is an efficient method of obtaining liquidity as selling shareholders don’t have to face the transaction costs and hassles associated with open market sales. Proceeds from selling shares also creates a source of diversification for the selling shareholder.
Alternatives
Stock buybacks are an alternative to dividends; both are ways you can distribute cash to shareholders. By repurchasing shares, you are distributing cash to existing shareholders for a fraction of the company’s outstanding equity. With dividends, a portion of your company’s earnings are paid to shareholders on a set schedule, however; you can also issue special dividends. Although both are methods of distributing cash to shareholders, only stock buybacks transfer equity portions.
