Under what conditions should a company consider buying back its stock?

A company should consider buying back its stock primarily when it believes the stock is undervalued and it has excess cash available to do so. This strategy allows a company to invest in itself at a lower price than it perceives the stock is worth, potentially increasing the value for remaining shareholders. By reducing the number of outstanding shares, the company can improve financial metrics such as earnings per share (EPS), which may positively influence the stock price over time.

When the stock is trading below its intrinsic value, repurchasing shares can signal to the market that the company is confident in its future performance, potentially attracting more investors. Additionally, having excess cash indicates that the company is in a stable financial position, allowing it to undertake such buybacks without endangering its operational capacity or future growth investments.

The other conditions listed do not present a favorable scenario for stock buybacks. In the case of declining stock prices, the effectiveness of a buyback could be compromised if the trend continues. Financial distress typically suggests that the company should conserve cash, rather than engaging in buybacks, and consistently high dividends indicate a strategy focused on returning cash to shareholders rather than reinvesting in the company.