What happened

Shares of Vipshop Holdings (VIPS 12.63%) have skyrocketed today, up by 13% as of 11:10 a.m. EDT, after the company announced a share repurchase program. Vipshop's board of directors has authorized a $500 million buyback program, which it can conduct over the next two years.

So what

The Chinese e-commerce technology company plans to repurchase Class A shares at its discretion using a combination of open market purchases, privately negotiated transactions, block trades, and potentially other methods. One Class A share of Vipshop is equal to five American depositary shares (ADS).

Green stock chart going up

Image source: Getty Images.

Vipshop's board will review the program on a periodic basis and may adjust the program's terms, such as its timing or size. Vipshop will fund the buybacks with existing cash on hand.

Now what

Investors tend to like buyback programs for a number of reasons. For starters, repurchase authorizations can sometimes be interpreted as a bullish signal that management believes the stock is undervalued. Additionally, buybacks can also potentially be accretive to earnings to the extent that the repurchases may reduce the total number of shares outstanding, or offset dilution related to stock-based compensation.

A $500 million program may be accretive when compared to Vipshop's current market cap of $21.8 billion. Vipshop finished 2020 with approximately $2 billion in cash on its balance sheet and the company generated $1.1 billion in operating cash flow in the fourth quarter. Between cash on hand and ongoing cash generation, the company will be able to easily fund the buybacks.