Explore share buybacks and learn how Spanish bank Santander’s €10 billion plan will benefit shareholders, boosting stock prices and market confidence.
What are share buybacks, and how might they benefit shareholders of Banco Santander? Recently, the bank unveiled an ambitious plan to execute share repurchases amounting to a staggering €10 billion, which subsequently sent its stock soaring in the market. While dividends are often heralded as the quintessential method for publicly traded companies to reward their shareholders, share buybacks have emerged as a compelling alternative, particularly among European banks, as part of their broader shareholder remuneration strategies.
On Wednesday, coinciding with the announcement of record financial results, Banco Santander disclosed its intention to initiate a share buyback program spanning from 2025 to 2026. This revelation was met with enthusiasm, as evidenced by the notable uptick in the bank’s stock price. Analysts from Deutsche Bank have identified other financial institutions, including Sabadell, Barclays, and the Austrian group Erste, as potential candidates poised to unveil similarly ambitious share buyback initiatives in the near future.
But what exactly constitutes a share buyback, and what advantages does it confer upon shareholders? In essence, a share buyback involves a corporation repurchasing its own shares from the market, subsequently reducing its share capital by either redeeming or eliminating the repurchased shares. This strategic maneuver effectively diminishes the total number of outstanding shares, thereby augmenting each shareholder’s proportional stake in the company’s capital and enhancing their share of future dividends.
To illustrate, consider a hypothetical scenario where a company has 100 shares outstanding, and a shareholder possesses 20 of those shares. In this case, the shareholder’s ownership stake amounts to 20% (20/100 = 20%). If the company decides to buy back 20 shares and subsequently redeems them, only 80 shares will remain in circulation. Consequently, the shareholder’s stake would increase to 25% (20/80 = 25%), as elucidated on the BBVA website.
The primary advantages for shareholders are twofold. Firstly, the share price is likely to appreciate, as the reduction in the number of shares available in the market, assuming the company’s valuation remains constant, leads to an increase in the price per share. Secondly, earnings per share (EPS) are expected to rise, given that the company’s profits are now distributed among a smaller pool of shares. Moreover, this operation typically does not incur tax liabilities unless the shares are sold, in contrast to dividends, which are subject to taxation as savings income in personal income tax.
A share buyback program serves as a mechanism for companies to generate additional value for their shareholders, as articulated on Santander’s website. The magnitude of such buyback programs is contingent upon the quantity of shares that can be acquired, thereby underscoring the significance of the program’s scale in determining its impact on shareholder value.
