Over recent years, share buybacks have been a popular capital management initiative amid surging profits in commodity-based industries, and broader macroeconomic uncertainty making it more difficult for companies to invest in growth opportunities during an aggressive rate hike cycle. Share buybacks have long been a strategy embraced by US-listed stocks, including many high profile names like Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOGL), which do not pay dividends. However, the practice has gathered momentum among ASX-listed stocks. Wondering what it all means? Here is everything you need to know about share buybacks. What is a Share Buyback? A share buyback is a capital management strategy enabling a company to return proceeds to shareholders. Many investors would be familiar with dividends, which represent a return of profits (or reserves), but a share buyback is an alternative where a company can increase shareholder returns. It occurs when the company repurchases shares from its shareholders, before cancelling those shares and reducing the total number of shares on issue. Since there are less shares on issue following a buyback, profits are distributed across fewer shares, improving returns on a pro-rata basis. This often gives rise to a higher share price. There are two types of share buybacks on the ASX - on-market and off-market - and a company must obtain shareholder approval if the buyback is for more than 10% of the lowest number of shares on issue across the preceding year. No approval is necessary below this threshold. Share Buyback Types on the ASX As mentioned above, share buybacks may be conducted either on-market, or off-market. During an on-market share buyback, the company will purchase shares on the open market, typically with the assistance of an intermediary. When a company launches an on-market buyback, it will outline the terms of the initiative, and at every stage it must conform with requirements around the maximum price it may pay on any given day, and the overall value of the buyback. On the other hand, an off-market buyback is a little more complex. The company conducts a tender offer where shareholders have the choice to sell their shares directly to the company. An off-market buyback is often done on an equal access' basis, but in some instances the offer may be selective', where it is targeted at certain shareholders. There are also employee share buybacks. The structure of an off-market buyback typically means that proceeds for shareholders consist of two components - capital returns and dividends. Shareholders will generally be invited to nominate a discount at which they would be willing to sell their shares back to the company. Based on the final results of the tender, the discount could be as much as 14% below the average weighted price during the buyback period. It may seem confusing that shareholders would elect to sell their shares back to the company at a discount, but there can be favourable tax circumstances for certain individuals due to franking credits. Why do Companies Buy Back Their Shares? There are a number of different reasons why a company may choose to conduct a share buyback, although it should be reiterated, this initiative is a capital management strategy. Therefore, it goes without saying, when a company has excess capital at hand, it may choose to pay a larger dividend than normal, or conduct a share buyback. With fewer shares on issue after a buyback, companies may be able to effectively increase their earnings per share (EPS), which in theory, with all else being equal, should give support to the company share price. You can learn more about valuation ratios like EPS here. Unlike dividends, which attract tax liabilities from the get-go, an on-market share buyback may not necessarily involve immediate tax obligations for shareholders. Keep in mind, however, this is likely to be very different for off-market buybacks, so make sure you speak to a licensed professional. In short, companies may choose to buy back their shares in an effort to: Boost shareholder returns Improve financial metrics and buoy share prices if management believe a stock is undervalued' Deploy surplus capital where there might be limited growth opportunities Change its capital structure, which may impact debt covenants (lender restrictions) Create more value for shareholders over the long-term (compared with dividends) Consolidate ownership or express confidence in the company outlook Share Buyback Considerations While share buybacks are intended to help drive value for shareholders, particularly over the long-term, there is no guarantee that this value' will be preserved over time. For example, a share buyback may help reduce the number of shares on issue, which should boost earnings per share when all else is equal. But if a company profits also decline, whatever the reason, then the upside' of the buyback, and a higher share price, may not transpire as expected. Share buybacks are often viewed as more favourable when the source of the money used to repurchase the shares is excess capital from profits, rather than debt. In the case of the latter, it could affect the company credit rating, making it more costly for a company to borrow, and potentially hurting profits. When it comes to off-market share buybacks, shareholders should weigh up a range of considerations, starting with the trading price, the structure of the capital and dividend components of the buyback, the price range or discount options available under the tender offer, as well as the company outlook. There are also a number of important thoughts to consider regarding your financial circumstances, including any capital gains or losses, your marginal tax rate, and the ability to benefit from any franking credits. So as always, speak with an accountant or tax adviser. You may elect not to participate in an off-market buyback, but if you do choose to sell your shares, they will go directly to the company. In contrast, capital gains or losses associated with an on-market buyback will only apply if and when you sell your shares on-market. Lastly, if you sell your shares during an on-market buyback, you won'tnecessarily be selling them to the company, as other buyers will still be active in the market."

This article covers:

• What is a Share Buyback?

• Share Buyback Types on the ASX

• Why do Companies Buy Back Their Shares?

• Share Buyback Considerations

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Over recent years, share buybacks have been a popular capital management initiative amid surging profits in commodity-based industries, and broader macroeconomic uncertainty making it more difficult for companies to invest in growth opportunities during an aggressive rate hike cycle. 

Share buybacks have long been a strategy embraced by US-listed stocks, including many high profile names like Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOGL), which do not pay dividends. However, the practice has gathered momentum among ASX-listed stocks.

Wondering what it all means? Here is everything you need to know about share buybacks.

What is a Share Buyback?

A share buyback is a capital management strategy enabling a company to return proceeds to shareholders. Many investors would be familiar with dividends, which represent a return of profits (or reserves), but a share buyback is an alternative where a company can increase shareholder returns. 

It occurs when the company repurchases shares from its shareholders, before cancelling those shares and reducing the total number of shares on issue. Since there are less shares on issue following a buyback, profits are distributed across fewer shares, improving returns on a pro-rata basis. This often gives rise to a higher share price.

There are two types of share buybacks on the ASX - on-market and off-market - and a company must obtain shareholder approval if the buyback is for more than 10% of the lowest number of shares on issue across the preceding year. No approval is necessary below this threshold.

Share Buyback Types on the ASX

As mentioned above, share buybacks may be conducted either on-market, or off-market. 

During an on-market share buyback, the company will purchase shares on the open market, typically with the assistance of an intermediary. When a company launches an on-market buyback, it will outline the terms of the initiative, and at every stage it must conform with requirements around the maximum price it may pay on any given day, and the overall value of the buyback.

On the other hand, an off-market buyback is a little more complex. The company conducts a tender offer where shareholders have the choice to sell their shares directly to the company. 

An off-market buyback is often done on an equal access' basis, but in some instances the offer may be selective', where it is targeted at certain shareholders. There are also employee share buybacks. The structure of an off-market buyback typically means that proceeds for shareholders consist of two components - capital returns and dividends. 

Shareholders will generally be invited to nominate a discount at which they would be willing to sell their shares back to the company. Based on the final results of the tender, the discount could be as much as 14% below the average weighted price during the buyback period. 

It may seem confusing that shareholders would elect to sell their shares back to the company at a discount, but there can be favourable tax circumstances for certain individuals due to franking credits.

Why do Companies Buy Back Their Shares?

There are a number of different reasons why a company may choose to conduct a share buyback, although it should be reiterated, this initiative is a capital management strategy. Therefore, it goes without saying, when a company has excess capital at hand, it may choose to pay a larger dividend than normal, or conduct a share buyback. 

With fewer shares on issue after a buyback, companies may be able to effectively increase their earnings per share (EPS), which in theory, with all else being equal, should give support to the company share price.

You can learn more about valuation ratios like EPS here.

Unlike dividends, which attract tax liabilities from the get-go, an on-market share buyback may not necessarily involve immediate tax obligations for shareholders. Keep in mind, however, this is likely to be very different for off-market buybacks, so make sure you speak to a licensed professional.

In short, companies may choose to buy back their shares in an effort to:

• Boost shareholder returns

• Improve financial metrics and buoy share prices if management believe a stock is undervalued'

• Deploy surplus capital where there might be limited growth opportunities

• Change its capital structure, which may impact debt covenants (lender restrictions)

• Create more value for shareholders over the long-term (compared with dividends)

• Consolidate ownership or express confidence in the company outlook

Share Buyback Considerations

While share buybacks are intended to help drive value for shareholders, particularly over the long-term, there is no guarantee that this value' will be preserved over time. 

For example, a share buyback may help reduce the number of shares on issue, which should boost earnings per share when all else is equal. But if a company profits also decline, whatever the reason, then the upside' of the buyback, and a higher share price, may not transpire as expected. 

Share buybacks are often viewed as more favourable when the source of the money used to repurchase the shares is excess capital from profits, rather than debt. In the case of the latter, it could affect the company credit rating, making it more costly for a company to borrow, and potentially hurting profits.

When it comes to off-market share buybacks, shareholders should weigh up a range of considerations, starting with the trading price, the structure of the capital and dividend components of the buyback, the price range or discount options available under the tender offer, as well as the company outlook.

There are also a number of important thoughts to consider regarding your financial circumstances, including any capital gains or losses, your marginal tax rate, and the ability to benefit from any franking credits. So as always, speak with an accountant or tax adviser. You may elect not to participate in an off-market buyback, but if you do choose to sell your shares, they will go directly to the company.

In contrast, capital gains or losses associated with an on-market buyback will only apply if and when you sell your shares on-market. Lastly, if you sell your shares during an on-market buyback, you won'tnecessarily be selling them to the company, as other buyers will still be active in the market.