What it means
An issuer bid is any offer by a company to repurchase its own securities. A normal course bid is the routine version, carried out through the stock exchange at market prices over up to twelve months, rather than a one-off special offer to all shareholders at a premium.
To start one, the company files a notice with the exchange that sets out how many shares it may buy, the reasons and the start and end dates. Exchange rules cap the total number of shares that can be bought in the period, usually expressed as a percentage of the public float (shares held by outsiders), and also limit how much may be bought on any single day relative to normal trading volume.
Companies use bids for several reasons. If management believes the shares are undervalued, buying them back is a way to invest in the business at a discount, and buybacks also return cash to shareholders in a way that is more flexible than a dividend because the company can slow or stop at any time.
A buyback reduces the number of shares outstanding, which increases earnings per share (profit divided by the number of shares) even if profit does not change. Return on equity (profit relative to shareholders' funds) also tends to rise, because equity falls while profit stays the same, though this effect alone does not create real value.
The notice does not oblige the company to buy anything. Many bids end with fewer shares purchased than allowed, because management may judge the price too high or may need the cash for acquisitions, debt repayment or a downturn.
Investors should look at what is funding the buyback. A company that buys back shares with spare cash flow is in a different position from one that borrows to do so, and buying at high prices destroys value for the shareholders who remain.
In practice
Real-world examples.
Example
A mining company with strong cash flow files an NCIB for up to 5% of its shares after its price drops sharply. The board says the shares trade below what it believes the business is worth.
Example
A utility with steady cash generation uses a bid to return surplus funds after selling a non-core division. Because it does not want to raise the dividend permanently, the bid gives it flexibility.
Example
A technology company buys back shares each quarter to offset the new shares it issues for employee options. The bid prevents the share count from rising and thereby limits dilution for existing shareholders.
Formula
Calculation
Earnings per share = Net profit / Shares outstanding
Worked example: a company earns $20,000,000 and has 10,000,000 shares outstanding. EPS = $20,000,000 / 10,000,000 = $2.00.
Under an NCIB the company buys back 5% of its shares, which is 10,000,000 x 0.05 = 500,000 shares, at an average price of $30.
Cost of the buyback = 500,000 x $30 = $15,000,000
Shares remaining = 10,000,000 - 500,000 = 9,500,000
If profit stays at $20,000,000, new EPS = $20,000,000 / 9,500,000 = $2.105, which is about $2.11.
In practice profit would be a little lower, because the $15,000,000 used for the buyback no longer earns interest or funds growth.Case study
Seen in the real world.
Maple Ridge Industries is an illustrative, fictional Canadian manufacturer with $40,000,000 of surplus cash after a strong year. The board debated whether to raise the dividend, make an acquisition or buy back shares.
The finance director argued that the shares were trading at a low multiple of earnings and that a bid was the most flexible way to use the cash. The board approved an NCIB for up to 4% of the public float, and the company bought shares gradually over eight months.
By the end of the period it had used only $25,000,000 of the allowed amount, because the price rose and the directors stopped buying. In this illustrative story, the lesson was that the notice gave permission rather than obligation, and the discipline of waiting for value saved the company money.
Watch out
Common mistakes.
- Assuming that an announced NCIB means the company will definitely buy the full number of shares.
- Believing a rise in earnings per share after a buyback means the business has become more profitable.
- Ignoring how the buyback is funded, when borrowing to buy shares raises financial risk.
Questions
People also ask.
Is an NCIB the same as a tender offer?
No, a normal course bid takes place through the exchange at market prices over time, whereas a tender offer is a separate, one-off offer to shareholders.
Who regulates NCIBs?
The securities regulators and the stock exchange in Canada set the rules, including limits on volume and requirements for disclosure.
What happens to the shares bought back?
They are normally cancelled, which reduces the number of shares outstanding.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%