Normally when a company has surplus cash, it has four choices as to what to do with the extra cash: The company can pay extra cash to its shareholders in form of dividend, can invest in other existing businesses or incur capital expenditure, can buy another business unit or can repurchase its shares back from shareholders in the form of share buyback.
A share buyback is a way to return capital to shareholders, which requires the shareholders to give up the stock of the company in order to receive cash. Those shares are taken off the market and pulled out of circulation.
Many fund managers think that companies returning surplus funds to shareholders is a good thing in the absence of exciting opportunities. It can be through paying dividends or buying back their own shares.
Benefits of Share Buybacks
- Increase in share price: When a company conducts a share buyback, the number of shares trading in the stock market decreases, which can cause an increase in share price;
- Increase in Earnings per share: With fewer shares trading, there is generally an increase in EPS;
- Removes excess cash from the company: The cash which is just sitting with the company is not doing anything for the company as it is earning very low rate of return. Removing the cash and utilising it in a useful way can lift the company’s overall performance;
- Buyback is considered as a positive sign: Investors usually see it as a sign that the company believes the price should be higher, when a company does a buyback.
Disadvantage of Share Buyback
- Wrong Judgement: Generally, a company does a buy back when it considers that the shares are available at a cheap price. But often it does not happen, and companies end up buying back their stock at what turns out to be at high levels, making the buyback a bad use of capital;
- Decrease in dividends: After doing buyback, the companies have less cash and often considers cutting back dividends;
- Inefficient use of capital: Instead of using the excess capital in doing something better, like, in expanding its business or ramping up marketing, hiring more employees, the company is buying its own shares, which implies that the company has no better plans for the foreseeable future;
Buybacks are critiqued overseas as they are considered to artificially increase the EPS of a company by reducing the outstanding shares and increasing the profit per share. Long term investors generally prefer higher dividends than buybacks as they must stay invested. That said, a buyback is intended to result in a technically more profitable, and valuable, company.
Let’s look at some examples of share buybacks in Australian market.
Aurizon Holdings Limited (ASX: AZJ)
Aurizon Holdings Limited is an integrated rail transporter of coal from mine to port for export markets and a heavy haul freight railway operator. Earlier in August 2019, the company announced share buyback of up to $300 million to reward investors, despite a 13 per cent decline in its statutory net profit for FY2019, to $473 million.
Source: Company’s Presentation
CIMIC Announces Further Market Share Buyback
CIMIC Group (ASX: CIM), an engineering-led construction company, has announced a further on-market share buyback of up to 10% of CIMIC’s fully paid ordinary shares. The company’s current on-market share buy-back ended on 28 December 2019.
- The new share buyback will be funded by a combination of working capital facilities and cash balances;
- The number of shares purchased, and timing will depend on the company’s share price and market conditions;
- The new share buyback is aimed at enhancing shareholders’ return and capital efficiency.
Amcor Announces Share Buyback of $US500 million
Amcor Plc (ASX: AMC)
Amcor PLC is a global leader in producing and developing responsible packaging for beverage, food, medical, pharmaceutical, home and personal care products.
The company has announced a share buyback of $700 million or $US500 million share buyback in Australia and the United States. The share buyback will be funded from recently sold packaging plants in Europe and the US.
Financial Highlights for FY19
The company gave solid performance for the year with good growth in various areas. Net sales saw an increase of 5.5% and adjusted net income increased by 9% - both in constant currency terms and on YoY basis due to marked improvements in working capital
The company’s adjusted cash flow after dividends stood at US$193 million. The company reported GAAP net income ofUS$430.2 million and cash flow from operating activities stood at US$776.1 million;
- Adjusted EBIT stood at US$1,075.4 million, up 5.7% in constant currency terms;
- The company declared total dividend of 45.5 US cents per share for FY19
AGL Energy Limited (ASX: AGL)
AGL Energy Limited operates Australia’s largest dual fuel and retail energy customer base, which comprises of a considerable portfolio of wholesale energy assets and contracts to support its retail customer base.
On August 2019, the company announced to undertake an on-market buyback of up to 5 per cent of its issued share capital (32.791 million shares) over the 12 months from 23 August 2019. This comes to around $650 million.
Qantas Airways Limited (ASX: QAN)
Qantas Airways Limited is engaged in the business of international and domestic air transportation services, the sale of worldwide and domestic holiday tours and associated support activities.
Highlights of AGM
The company reported underlying profit before tax of $1.3 billion for FY19, which was lower than the record result the company achieved in 2018, due to headwinds it faced during the year. Due to higher oil prices, the company’s fuel bill rose more than $600 million, and the company also had a $154 million hit from lower Australian dollar on non-fuel expenses.
In FY19, the company returned $1 billion through dividends and buy-backs and in the month of August 2019, it announced a fully franked ordinary dividend of 13 cents. The company announced a $400 million off-market buy-back of up to 80 million shares.
Qantas has successfully completed Buy-Back: Qantas Airways Limited has successfully completed its buy-back programme which was off-market and included 79.7 million shares worth $443 million.
The key outcomes of the buyback are given in the table below:
(Source: Company Reports)
Fortescue Metals Group Limited (ASX: FMG)
Extension of On-Market Share Buy-Back Program
FMG announced an extension of its on-market share buy-back program as part of its ongoing capital management. The buy-back will continue for a further 12 months, until October 2020, and re-established the total amount of the buy-back program at $500 million. The company can now buy-back up to $500 million worth of shares during the period.
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