Definition:

Repurchase of Common & Preferred Stock refers to the process by which a company buys back its own shares from the marketplace. This can include both common and preferred stock. The repurchase reduces the number of shares outstanding in the market, which can increase the value of remaining shares and improve financial ratios.

Examples

A technology company buys back 1 million of its common shares to reduce dilution and increase earnings per share. A financial institution repurchases preferred stock to adjust its capital structure and improve return on equity.

Formula:

There is no specific formula for calculating the repurchase of stock, but the impact can be measured by:

New Shares Outstanding = Previous Shares Outstanding - Shares Repurchased

How to use the metric:

Investors and analysts use stock repurchase information to assess a company's confidence in its future prospects, its capital allocation strategy, and the potential impact on earnings per share and shareholder value.

Limitations:

Stock repurchases can sometimes be used to artificially inflate financial metrics like earnings per share without improving the company's actual performance. They may also divert funds from potentially more productive investments like research and development or capital expenditures.

Applies to:

Stock repurchase strategies are commonly used in industries with stable cash flows and mature companies, such as technology, consumer goods, and financial services.

Doesn't apply to:

Industries that are highly capital-intensive or in growth phases, such as biotechnology or startups, may not benefit as much from stock repurchases because they often need to reinvest earnings into growth opportunities.

Summary:

Repurchase of Common & Preferred Stock is a financial strategy used by companies to buy back their own shares, potentially increasing shareholder value and improving financial metrics. While it can signal confidence in the company's future, it may also be used to manipulate financial ratios and divert resources from growth opportunities.