Recently, the Nation Media Group was granted the nod to purchase up to 10 percent of its issued and paid-up share capital (approximately 20 million shares) in an open market share buyback programme.
With a buyback yield – share repurchase value over total market capitalisation of 10 percent – is the decision well-timed or has the media house passed on deeper discounts (speaking speculatively should the price continue to fall)? Let’s wait and see but in today’s article, allow me to write broadly about the subject.
To start with let us define buybacks. When a company repurchases its own shares it’s called a share (or stock) buyback.
The firm either buys them in the open market, just like how you as an investor would do or can directly make what is known as a “tender offer” to its existing shareholders, which allows interested shareholders to sell or “tender” their shares directly to the company.
Once shares are repurchased, a company can cancel them, which reduces the number of shares it has outstanding. The process is one way a company returns cash to its shareholders (dividends are another).
Generally, if no other investment option for cash looks as appealing as its own equity, a company may plan a buyback. This could be considered a more conservative, less risky choice than using cash to expand its factory. It’s also an indication that growth opportunities may be tough or expensive to pursue.
Why not pay the excess cash in dividends?
A company may feel its share is undervalued and through buybacks can boost its share prices. The result of the pressure of having a constant buyer in the market for a stock effectively tends to act as a support base absorbing constant sellers. This may not be easily achieved through a dividend payout as it’s an event while a buyback is often a prolonged process.
Interestingly, for “optics” sake, the dividend per share tends to rise faster as a result of the buyback. This is because even with a stable dividend cost over time, the lower pool of shares for the dividends increases the dividend per share.
What do buybacks mean for you? One, your investment stake in the stock increases. If a company is buying 10 percent, your stake goes up from 10 percebt to 11.1 percent if you don’t participate in the buyback.
Two, dividend income is taxed while income garnered from selling stocks is not (remember capital gains tax […]