When a company has spare cash, it has a short list of things it can do with it. It can invest in the business, pay down debt, hand money to shareholders as a dividend, or buy its own shares back from the market. That last option, known as a share buyback or repurchase, tends to draw the most attention, partly because of what it implies about how the people running the company see its value.
The mechanics are simple. The company goes into the open market and buys its own stock, just as any investor would. Those shares are then retired or held by the company, which means fewer remain in public hands. Every remaining share now represents a slightly larger slice of the business. If profits stay the same, profit per share goes up, because the same pie is being cut into fewer pieces.
Companies choose buybacks for a few reasons. One is flexibility. A dividend is a promise that investors expect to see repeated every quarter, while a buyback authorization is only a ceiling. Management can buy quickly, slowly, or not at all. Another is signaling. When a board says it will spend money on its own stock, it is telling the market it believes the shares are cheap. A third is that buybacks can offset the new shares handed to employees as pay. Critics have a fair point too: money spent on repurchases cannot be spent on growth or on reducing debt, and a buyback announced is not the same as a buyback completed.
That background helps make sense of what happened when Better Home & Finance Holding Company (NASDAQ: BETR) said its board had authorized the repurchase of up to $30 million of its Class A common stock. Better is an online mortgage lender that runs applications through its own software platform, called Tinman, and also offers home equity loans. The company plans to start with an initial $10 million phase, buying through the open market, and the program expires a year from now.
Size is what makes this notable. Better’s market value is about $192 million, so the full authorization equals roughly 16% of the company at the current stock price. The shares have had a hard year, down almost 70% this year. In the announcement, Vishal Garg, the company’s founder, said he believes the stock is deeply undervalued, trading at less than one times revenue.Â
Timing matters as well. Three days earlier, Garg regained control of the board after shareholders holding 52.02% of the voting power backed the removal of five directors. The board shrank from nine seats to five, and as of October 5th an interim chief executive had been identified but not yet announced. Garg, now listed as Chief Platform, Product, and Innovation Officer, calls the plan Better 2.0, and the buyback is one of its first visible steps.
Funding is the open question. Better says the buyback will be paid for through cost savings and what it calls capital releases, with the pace of buying tied to how quickly those arrive. The company says it has already cut about $1 million a month from marketing and outside legal and data vendors. It is also working to sell its U.K. bank subsidiary, Birmingham Bank, a deal that still needs regulatory approval and final documents. Management has said that sale would lift cash to about $140 million on a pro forma basis. The announcement gives no figures for debt, and Better lost about $30.6 million in its most recent reported quarter, so the $30 million is best read as a ceiling that depends on those savings and sales coming through.
A buyback is a statement of confidence with a spending limit attached. Better has made the statement. Whether the full $30 million is spent will depend on how quickly costs come down, whether the bank sale closes, and how the mortgage business performs over the next twelve months.
