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Wednesday, March 04, 2009 10:34:29 PM
Companies making profits typically have two uses for those profits. Firstly, some part of profits are usually repaid to shareholders in the form of dividends. The remainder, termed retained earnings, are kept inside the company and used for investing in the future of the company. If companies can reinvest most of their retained earnings profitably, then they may do so. However, sometimes companies may find that some or all of their retained earnings cannot be reinvested to produce acceptable returns.
Share repurchases are one possible use of leftover retained profits. When a company repurchases its own shares, it reduces the number of shares held by the public so, even if profits were to remain the same, this would have the effect of increasing earnings per share. So, repurchasing shares, particularly when a company's share price is undervalued or depressed, can provide a competitive return on investment.
http://en.wikipedia.org/wiki/Share_buyback
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