Buybacks or share repurchases are a part of capital management programs undertaken by the companies, usually to deliver shareholder value. However, there could be other reasons as well. Some other reasons include reducing supply, preventing other shareholders from gaining a controlling stake, undervalued stock prices, among others.
Share buybacks are similar to dividends in many ways, as the company distributes cash to holders of its shares through the acquisition of their holdings against a price/consideration. Further, buybacks often provide some tax benefits, depending upon the jurisdiction.
Although, there have been critics of share buybacks as well. Most prominently, Warren Buffet said that buybacks conducted at a price above the intrinsic value could adversely impact the expected value.
Corporate America has been setting records in buybacks. In 2018, the US companies surpassed the mark of $1 trillion in buybacks in the US history. Also, Apple had conducted buyback worth $100 billion during the year.
However, the frequency and cash spent on buybacks are coming down. According to media reports, the S&P 500 companies bought back shares worth USD 161 billion in the second quarter of 2019, which was 18% less than the first quarter. It was also said that the share repurchases had been prominent contributors to bull run.
Some of the prominent examples of buyback failures include:
- The USD 18 billion share buyback by Bank of America in two years through to 2007, and in 2008, the stock price fell 60% amid Global Financial Crisis.
- AIG conducted buyback worth USD 6 billion in 2007, and during the Global Financial Crisis in 2008, the stock price fell 96%.
On-market buybacks – In these buybacks, the company conducts buyback of shares during normal trading hours via market participants. The companies might act at their own discretion to conduct share buyback at a given price.
Off-market buybacks – In these buybacks, the company provides detailed information related to buybacks, and the information might include eligibility, number of shares, important dates to apply etc.
Let’s look at some possible reasons:
Shareholder Value: Buybacks allow the companies to deliver shareholder value in two ways. First, it allows the shareholders to receive cash against the shares of the company held by them. Second, if the shares bought during the buybacks are cancelled, it reduces the total shares outstanding, and ultimately lowers the dilution. As a result, it increases the stake of each shareholder in the company.
Value Gaps: At times, the stocks are heavily beaten in the markets due to adverse developments in any company’s business, among others. Severe fall in the price of the stock of any company could lead to a gap in its value and price.
Therefore, the companies often act opportunistically at such times, and conduct buybacks to gain from the severe value gaps in the price. The company’s capacity to buyback shares depends upon the jurisdiction.
Employee Rewards: Companies also buy-back shares to reward those shares to its employees as a part of its employee incentive plan, among others. Under this type, the company refrains from issuing new shares as a part of employee incentive plans, and shares bought from the market are utilised in issuing shares to the employees.
Qantas Airways Limited (ASX: QAN)
Qantas is conducting an off-market buyback for up to 79.7 million shares through a tender offer that was announced during its full-year results in August 2019. The buyback would include a capital component and a deemed dividend component for Australian tax purposes.
Further, the tax consequences of the buyback would be idiosyncratic to every shareholder. The shareholders that are ineligible for the offer are excluded foreign persons, holders of ADRs and restricted employee shares.
The shareholders on the record date – 3 September 2019 are entitled to participate in the tender offer. The tender offer was opened on 23 September 2019 and closes on 1 November 2019. On 4 November 2019, the company is expected to announce the buyback price, and scale back (if any).
Important Dates (Source: QAN Buyback Booklet)
In addition, the eligible shareholder holds over 100 shares then minimum 100 shares are required to be tendered. If the shareholder holds less than 100 shares, then all of the shares should be tendered.
On 29 October 2019, QAN was trading at $6.495, up by 0.77% (at AEST 1:28 PM). On a YTD basis, the return of the stock is +12.67%. In the past three months, its return has been of +11.70%.
Computershare Limited (ASX: CPU)
In its full-year results, the company has announced to conduct an on-market buyback program for $200 million for the year FY 2020. The buyback program started on 3 September 2019, and the company has been buying back shares since then.
It is reported that the company would continue the buyback program until 2 September 2020 or earlier if completed before. Goldman Sachs has been working on behalf of the company to buy back shares from the market.
According to the latest release on 28 October 2019, the company is left with approximately $170.2 million of cash consideration to be paid against the bought back shares.
On 29 October 2019, CPU was trading flat at $16.02 (at AEST 1:39 PM). On a YTD basis, the return of CPU is -5.76%. In the past three months, the return of the stock has been -0.37%.
Scentre Group (ASX: SCG)
On 27 June 2019, the group has notified to conduct an on-market buyback for $800 million. The announcement was made in conjunction with the notification of its sale of the two Sydney CBD office towers to Blackstone for $1.52 billion.
It was said that the buyback would allow the company to enhance return on equity and maintain its strong balance sheet position.
On 29 October 2019, SCG was trading at $3.85, down by 0.773% (at AEST 1:42 PM). On a YTD basis, the return of SCG is +1.56%. In the past three months, the return of the group has been -1.27%.
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