There is a lot of talk about companies repurchasing shares. Then some new shares are also 'created'. It is said that share repurchases are becoming more popular, since for taxation reason for example, the company may choose to transfer money to share owners via repurchases rather than dividends. However, there is the fact that the number of shares is finite. I would assume that the repurchase numbers exceed the numbers of created shares. So in the long run, would't the company risk `running out' of shares by 'preferring' share repurchase over the dividend payouts. Am I missing something obvious?

  • Are you talking about Dividend Reinvestments?
    – Victor
    May 20 '15 at 3:50
  • Does the company issue options with debt or to employees that may be part of the picture you aren't seeing here?
    – JB King
    May 20 '15 at 22:58

number of shares is finite

Yes it is

I would assume that the repurchase numbers exceed the numbers of created shares

Number of shares repurchased by company would never exceed in theory the total number of shares. It can become Zero, however its unlikely as it would run on its own and its not possible. In practise company generally repurchase a small percentage say 5% - 10% of the outstanding shares.

The number of shares additional created is irrelevant. Its the total shares that is relevant.

A company starts with say 100 shares, over the period it creates new shares [via various mechanisms, Rights issue, split, Additional shares, etc] say to the extent of 50. So now the company has total shares of 150. This lets say is held by 15 entities. The company can buy back say 15 shares in a year, and keep doing this, next year another 10 etc. However a company if it purchased all 150 of its own shares is unlikely as the Majority shareholders will not like this to happen and loose control.
There are 2 different things, buying out of minority shareholders, typically different percentage of the shares are held by non-promoters and available for trade can range from 10% to 70% ... there are also listing norms. Quite a few stock-exchange need atleast 10% shares to be available for trade [held by non-promotors]. In case a company has a small number of shares held by non-promoters, it can buy back the shares and delist the company from the exchange.

  • Thank you for that. I am at least somewhat aware of what you say. But this then means that a company cannot replace the dividend payout with the share repurchases indefinitely? I guess this is more a theoretical question regarding next 100 yrs (and of course the company may not even exist that long).
    – AnyAD
    May 20 '15 at 9:07
  • 1
    Dividends and share repurchases are not the only option for the company. Many hoard the cash and then use it to acquire a new company, or invest it in new factories, or open new stores, or to hedge against some expected downturn. May 20 '15 at 10:15

The holders of the shares have to agree to sell them to management in a share repurchase. Typically, share repurchases are done in the open market, causing market activity to increase the share price marginally. This is how the company returns the value to shareholders. The company could also negotiate a price with a mutual fund, or founder, for a large block.

If they get close to the point of purchasing all outstanding shares, this would be exactly the same as the management of the company taking the company private, buying out all existing shareholders.

To prevent a single holdout from keeping say the very last share for one million dollars or the like on the open market, they would generally propose to the board of directors the buyout terms with a price per share, and most corporate charters are written such that the directors' vote binds minority shareholders to buyout or merger decisions.

Michael Dell famously took Dell Computer private in 2013, raising external money to offer a fair price to the board, which accepted it, letting him take it back to private status.

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