The escalating uncertainties around the globe due to the accelerated spread of COVID-19 are pushing the world towards recession. Economists around the world are projecting an impending global financial crisis (GFC), and experts have mixed views towards the implementation of a buy-back, a practice being discussed and implemented in the current market scenario.
Understanding a buy-back
Under a buy-back program, a company buys its own outstanding securities that were first issued to raise capital for the company, where the shareholders give up ownership in the company and other benefits that a shareholder has like dividends. In return, a shareholder is paid the fair market value of the stock, generally with a premium, at the time of buy-back.
Types of Buy-Back
According to the Australian Securities & Investment Commission (ASIC), there are five basic types of share buy-backs:
- Equal access buy-back: It is the most basic form of share buy-back where shareholders are presented a fair opportunity to contemplate the offer to buy-back the same proportion of their ordinary shares.
- Selective buy-back: Unlike equal access buy-back, matching offers are not made to each shareholder under selective buy-back. However, offers are made to only particular shareholders in the company and require prior approval of the scheme by the shareholders.
- On-market buy-back: It is when the company undertakes buy-back of its shares in on-market trading on the stock exchange after the passing of an ordinary resolution if over the 10/12 limit.
- Employee share scheme: It is one where the company undertakes a buy-back of shares that are held by employees or for employees or a related company or the salaried directors of the company.
- Minimum holding buy-back: It is when a company buys unmarketable parcels of shares from shareholders called minimum holding and does not require a resolution, but the cancellation of the purchased shares is mandatory.
Why does a company execute buy-back of shares?
Buy-back of shares induces several benefits for the business, such as providing tax benefits. The most important advantage of the buy-back for a company is that it indicates the investors that the business believes it is undervalued. As the company uses its reserves to buy-back its own shares, a positive signal is sent to the investors that the shares are undervalued, and the company has confidence in its growth prospects.
On the one hand, the world’s top cash cows are looking to implement share buy-backs, whereas, on the other hand, others have suspended the buy-backs as the fear of economic downturn moves closer to becoming a reality.
Buy-back in times of recession can turn out to be a good option for the companies to build confidence among the investors. The contagion effect of COVID-19 pandemic and the gravity of its escalation has taken the business into misery, especially airlines and other travel-related businesses.
Markets seem nowhere near to returning to green zone trading as the investors shy away from putting their money in this highly volatile market environment. Investors, in the present scenario, are showing extremely low confidence in the market.
Let us look at recently announced buy-backs from major companies operating globally.
Qantas Airways’ $150 million Shares buy-back
Citing the opportunity, Qantas Airways Limited (ASX:QAN) informed the ASX on 10 March 2020 about a buy-back plan of up to $150 million of its shares. However, the size of the program may vary at QAN’s discretion subject to certain legal restrictions. Qantas, equal access buy-back provisions, announced for selective buy-back (off-market).
Amidst the heavy amount of uncertainties surrounding the aviation business, Qantas has deferred the payment of $201 million shareholder interim dividend previously scheduled for payment on 09 April 2020 to 01 September 2020.
The airline’s business has been severely hit due to the COVID-19 breakout, and the company has suspended scheduled international flights from late March, following latest government travel advice. Qantas believes that it has a strong balance sheet and is in a better position than its counterparts in such critical times.
Apple Bags a Fair Deal for Buy-back
Tech giant Apple Inc. has also bagged a never-before deal amidst the recent panic sell-off from the investors. The iPhone-maker has bought billions of its shares at a discount that was hard to imagine - all thanks to the panic selling during one of the sharpest plunges the markets have ever seen.
Before the latest panic selling, Apple stocks were trading at a price at which a buy-back would have cost billions to the company. The program in such tense situations makes the investors ponder upon the intrinsic value of the stock and signifies Apple’s confidence in its own business fundamentals.
Starbucks Authorises Buy-Back Amidst Market Turmoil
Another news concerning buy-back plans came from the coffeemaker Starbucks Corp., which had authorized a repurchase program of up to 40 million shares of its common stock, ahead of the virtual shareholder meeting held on 18 March 2020.
This plan announced by the Starbucks is in addition to the 16 million shares that continue to be accessible as of 29 December 2019 for repurchase under an existing program. Moreover, the company reported repurchases of about 140 million shares and had returned $12 billion to shareholders by way of dividends.
As the world grapples with the rapid outbreak of the coronavirus, which is now present in more than 180 countries and territories, Starbucks believes that it is financially strong and resilient in enduring through these unprecedented circumstances.
$2 Billion Buy-Back for JD.com
Another recent share repurchase program to buy $2 billion worth of its shares over the coming 24 months was announced by China’s leading technology-driven e-commerce and retail infrastructure service provider, JD.com Inc.
The proposed plan comprises of the repurchases that can be executed from time to time on the open market, subject to prevailing market conditions and in compliance with appropriate rules and regulations.
The company looks forward to funding the buy-back bonanza amid market turmoil through its existing cash balance.
Oracle’s Additional Buy-Back
Amidst higher-than-expected quarterly profit for the third quarter ended 31 December 2019, business software giant, Oracle Corp announced an additional buy-back of $15 billion worth of shares.
Oracle stocks had witnessed a double-digit plunge in its price during the planet-wide sell-off in the financial markets over fears about the COVID-19 outbreak.
The tech company had repurchased $20 billion over the previous year while the latest buy-back program is anticipated to cool down some investor ambiguity about Oracle's business in these highly uncertain times.
During times of massive sell-off, a high number of buy-backs shouldn’t come as a surprise since companies would want to remain in business and buy-backs are a proven tool to draw investor attention during a time when high volatility and uncertainty is prevailing in the markets.