Mining and commodity trading giant Glencore PLC (LSE:GLEN) has formally announced the kick-off of a US$1.5bn share buyback programme.
The repurchase operation is expected to be completed before the publication of the group’s interim results in August.
It has signed up the London arm of UBS to make the stock purchases.
So why is Glencore (and many others) doing this?
When a company buys back its own shares, the shares are retired, reducing the number of shares outstanding. This, in turn, increases the value of each share, which benefits shareholders who hold on to their shares.
Businesses such as Glencore acquire stock rather than returning cash to shareholders in the form of dividends for several reasons - one of the most significant of them is tax efficiency, particularly for large professional investors.
Another reason is that share buybacks give companies more flexibility in how they distribute their cash.
Dividends are seen as a more permanent commitment to shareholders, whereas buybacks can be more easily adjusted or suspended if the company needs to redirect its resources.
Boosting EPS
Stock repurchase schemes can also boost a company's earnings per share, making the company's stock more attractive to investors.
This can lead to an increase in the company's share price, which benefits shareholders.
Finally, some companies use share buybacks to offset the dilution caused by employee stock options or other equity-based compensation programmes.
By reducing the number of shares outstanding, the company can mitigate the dilution effect of these programs, which can have a positive impact on the company's stock price.