buy-back

There is that moment at a family meeting when someone who once sold their share of the family land, out of need or pressure, comes back years later with money in hand and says, let me buy that portion back. Everyone else who still holds their share suddenly finds their own portion worth more, because the land has not changed, but now fewer people are sharing it.

That is exactly what a buy back is in the world of companies and shares. A company that has sold shares to the public before, maybe on the Nigerian Stock Exchange or the London Stock Exchange, decides to use its own cash to buy back some of those shares from investors who are willing to sell.

Once those shares are bought back, they are usually retired or held in reserve, which means there are now fewer shares moving around in the market. The company has not grown its profit by one kobo, but each remaining share now represents a bigger slice of that same profit.

Say Dangote Cement has extra cash sitting idle after a good year, and the board decides the shares are underpriced. Instead of paying that cash out as dividends, they announce a buy back, purchasing shares from willing sellers on the exchange. The shareholders who stay in are now holding a bigger piece of a slightly smaller pie of shareholders.

A relative in London who owns shares in a UK company might get an email about a buy back programme and wonder if it affects them if they choose not to sell. It does, calmly in their favour, because their shares become scarcer and often rise in value over time.

Companies do this for different reasons. Sometimes they genuinely believe their shares are cheap and want to reward loyal shareholders. Sometimes it is to push up the share price ahead of a big announcement. Either way, it is worth asking why the buy back is happening before celebrating it.