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Step 1
Compute the number of shares outstanding of the stock. Multiply the result by the price per share. The result is the market capitalization of the company. Decide how much money the company has to invest in buying back shares. Know that the announcement of the stock buyback will immediately raise the price of the stock.
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Step 2
Make certain no convertible preferred shares outstanding are in the money. If so, the corporate management must not decide to exercise the convertibility feature or the value of the buyback will be lost.
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Step 3
Make a public announcement of the buyback. Buybacks can take several forms. Choose whether to make the buyback an auction or by occasional purchases in the secondary (trading) market. Announce the number of shares to be repurchased. If the buyback is by auction, have legal professionals create appropriate documents and send them to all shareholders. The legal document should state a time and date for receiving all stock tenders. Management must decide in an auction whether to offer a fixed price for shares or if they will accept a percentage of shares. Irregular buybacks and auctions must both receive board of directors approval.
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Step 4
Institute occasional stock buybacks in order to provide long-term support for the stock price. Buy stock during times of weakness or when a bear market affects the broad market, and all stocks fall. Usually, stock buybacks have a defined period during which the buyback would take place. Announce the status of the buyback during quarterly earnings periods.
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Step 5
Buy stock until the cash reserves for the buyback are exhausted. If the company has regular cash flow, use stock buybacks instead of dividends and avoid the double tax that dividends face. Know that stock bought back into the Treasury and retired is a permanent positive effect on earnings. Do not use stock buybacks when the company has an irregular cash flow.
