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Won't it be better for companies to buy back their stocks when it's possible. They won't have to answer to the shareholder or pay dividends.

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    There was a similar question a month or so ago asking what happens if a company buys back all it's shares. The answer: it can't happen, due to the legal nature of the corporation, which can't own itself. – RonJohn Oct 15 at 13:30
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    Sometimes they do. Sometimes they use profits to expand their business. Sometimes they use profits to reduce debt. All are viable options and common. – Pete B. Oct 15 at 13:32
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    Possible duplicate of What happens if a company buys back all of its shares? – RonJohn Oct 15 at 17:10
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    @88892 the company did not buy all it's shares; Michael Dell bought all the shares. – RonJohn Oct 15 at 17:13
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    Wouldn't it be mathematically impossible for a company to do so? At least in theory the free market should value the cash held by the company as being less than the value of the company itself. – Stephen Oct 16 at 7:09
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Well, a corporation can't buy back all of its shares because it cannot "own" its own shares - it can only remove shares from the market. Someone must own shares at some point. So let's ignore the "all" part of the title.

Won't it be better for companies to buy back their stocks when it's possible. They won't have to answer to the shareholder or pay dividends.

Share buybacks do not reduce the obligation to shareholders - they just reduce the pool of eligible voting shares. Treasury shares have no voting rights, so all remaining shares would represent the ownership of the company.

Even private companies have to answer to shareholders, which is just a fancy term for "owners". If a company does NOT act in the owners' interest, then the owners will replace the board or management with someone that will.

Also, dividends are not obligatory - a company can decide to stop paying dividends at any time, though that is typically a huge negative signal that can crush a company's share price.

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    Upvoted for Even private companies have to answer to shareholders, which is just a fancy term for "owners". – dwizum Oct 15 at 13:48
  • I don't think this answer addresses "all their shares". – RonJohn Oct 15 at 16:53
  • @RonJohn true - edited. – D Stanley Oct 15 at 18:20
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Certainly companies do do share buy-backs as an alternative to issuing dividends. It is pretty standard. But what about buying back all the shares?

Ignoring all sorts of company law and accounting issues that would get in the way, imagine the last tranche of shares is being bought back. Those shareholders own 100% of the company. The fair value for that tranche of shares is the entire value of the company which can only be realised by liquidating all the company's assets and giving the money to the shareholders.

Buying back all the shares is the same as dissolving the company.

If there were assets left that had not been distributed to shareholders they simply revert to the Crown (it is what is known as 'bona vacante' i.e. 'lost property').

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"earn enough profit":
The basic idea of a corporation is that some people get together to start a business, and they get a percentage of ownership of the business proportional to how much they put in. For a publicly traded company, this ownership can then be traded from one person to another in the form of shares of stock. The total value of all the shares put together is known as the "market capitalization". It's what "the market" thinks the company is worth. It's not generally possible to "earn enough profit" to buy back all the shares, because earning more money just increases the market capitalization. The more money the company makes, the more the market will think it's worth, and the harder it is to buy all the stock. If the value of the company is the initial capital plus its profit, then using just the profit to buy something worth the profit plus the initial capital is getting something for nothing. It's like trying to use a dollar bill to buy a dollar bill plus an apple. Who'd be willing to make that sale?

"companies buyback all their shares":
But the company is its shares. A company can buy some of its shares, but while, say, buying half of its own shares might seem like it's halfway to buying all of its shares, it actually isn't. Once a company buys half of its own shares, the remaining shares make up all of its outstanding shares. As weird as it is, there's a sense in which we've taken 50% from 100% and we're still left with 100%.

"They won't have to answer to the shareholder":
Who won't have to answer to the shareholder? A "company" is not an autonomous entity. It is simply a collective that represents its shareholders' interests. Why would the shareholders want their company to not answer to them? Perhaps you're thinking of the CEO and/or the board of directors. But they are not "the company", they are simply employees of the company chosen to represent its interests. If the board of directors votes to buy back stock, it's still the company that is buying back the stock. The board of directors doesn't become the owners of the stock, and they still have to answer to the remaining stockholders.

"or pay dividends": A company doesn't have to pay dividends. It pays dividends because it (as represented by the executives, who represent the shareholders) have decided to do so. What would be the point of a business that doesn't give its owners any money? There are cases where companies don't pay any dividends, and shareholders buy stock in expectation that eventually dividends will be paid.

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Imagine a company is worth $10 million. In order to buy back its shares, it would need $10 million. In other words, it would need to consume its entire value in order to buy all its shares. That would leave the company with nothing left. So that would effectively be a dissolution of the company.

If there's nothing better a company can do with its value than return it all to its shareholders, then this is a reasonable course. Effectively, it's a dividend followed by a dissolution.

But if a company has any reasonable chance of producing additional value, this would be an impossible thing to do. A company with $10 million in liquid assets would, we hope, also have some additional value due to its future prospects. So $10 million wouldn't be enough to buy all its shares because shareholders would want to get some value from those future prospects as well.

So only a hopeless company could do this.

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As others have already indicated, sometimes public companies go private, it can alleviate hassle and be more lucrative for the owners. However, rarely do the original owners have enough capital to take the company private. There will usually be an investment firm/conglomerate involved, so as @D Stanley mentions, just a different set of owners to please.

Even if the original owner(s) had sufficient capital to take the company private, it may not be in their best interest to do so. Going private can degrade brand loyalty. Many people like owning Apple stock and are fans of their products. I have friends who almost exclusively shop at Target because they own Target stock. Spending where you invest is fairly common. Similarly, being publicly traded gives you a fair bit of exposure, not always a good thing, but you can expect to hear about big public companies quarterly.

Another downside of going private is that it likely eliminates investment diversity. If the original owners can pool resources and take the company private, the company might now represent an out-sized portion of their investments. It sounds nice to bet on yourself and your company, but being diversified is prudent.

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    I don't think this answer addresses "all their shares". – RonJohn Oct 15 at 16:54
  • @RonJohn How so? Going private entails buying out all public shares. – Hart CO Oct 15 at 17:00
  • Going private just means that shares are not traded on the open market. But some entity still owns the shares (whether a person, a private equity firm or another privately held company) and is voting to elect the company officers and board of directors. OP's question is about the company buying itself. – RonJohn Oct 15 at 17:05
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    @RonJohn Yes, I'm saying based on context and common usage, that I don't think the OP means exactly what they said. – Hart CO Oct 15 at 17:10
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    "I don't think the OP means exactly what they said". Then challenge OP on that in a comment. I issued a VTC-Duplicate; if OP comes back and clarifies that's not what he means, I'll retract it. – RonJohn Oct 15 at 17:12

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