Share Buybacks – A Bellwether Of Buying Interest

Foreword from ShareInvestor

This article “Share Buybacks – A Bellwether Of Buying Interest” by Goh Eng Yeow was first published in The Straits Times on 31 Mar 2014 and is reproduced in this blog in its entirety.

They can give a company’s stock a big boost, records show

Share buybacks are increasingly seen as a way by companies to return capital to their shareholders, but canny investors who get a piece of the action can also end up in the money as well.

Just ask the shrewd dealers who jumped on Apple Computers’ buyback bandwagon last month.

The tech giant had stunned investors by announcing a gigantic US$14 billion (S$17.8 billion) purchase of its own shares.

Chief executive Tim Cook essentially said the move was Apple betting on Apple.

The company has over US$140 billion in its coffers and rakes in oodles more cash every month from sales of gadgets such as iPhones and iPads.

It needed to bet on something other than the measly returns it gets from placing the cash in the money market so a bet on itself looked a smart move.

But whatever its motives, the buyback gave its stock a big boost – just what those canny investors who bought in were betting on.

Apple stock has swung from US$500 before news of the February share buyback to as high as US$544 last week, as it lured fence-sitters to load up on the stock again.

Some stock pundits see it is another convincing demonstration that money can be made by closely tracking the trading patterns of stock purchases by companies and their bosses, especially the cash-rich ones with powerful money-making operations.

No doubt, moves by companies such as Apple might also have been prompted by activist shareholders like Mr Carl Icahn who had been agitating for more aggressive share repurchases.

But in the still uncertain business climate in the United States, investing in itself via share buybacks appears to be one of the few viable options for a firm to spend its cash if its stock is trading below what it believes is its worth.

There is a further benefit: Even though dividend payouts do not attract further taxation if an investor is resident in a country such as Singapore, this may not hold true elsewhere.

So share buybacks have become a more efficient way to distribute earnings back to some international investors without inflicting them with further taxation.

When a company buys back stock and cancels it, this reduces the total number of shares, which helps to push up earnings per share.

This, in turn, helps lift a stock’s dividend yield.

In Singapore, however, many companies keep the repurchased shares as “treasury stock” and re-issue them to management and staff as part of performance award schemes.

US research suggests that shares in a firm that announces a buyback outperform the wider market by about 1.4 per cent over the following 12 months.

A casual glance at share buyback records shows that the same may hold true here.

DBS Group Holdings, for example, has bought back 4.47 million shares for $72 million in the past two weeks at prices ranging from $15.66 to $16.11 apiece. This was well below the year’s peak of $17.41 reached in January.

The lender’s previous big spending spree had been between August and December 2011 when it bought 8.64 million shares worth $115 million at an average price of $13.31 apiece.

Investors who emulated the lender in buying around the same time would have also done well as DBS is up by 21 per cent in price since then.

Big share buybacks can be even more eye-catching for smaller firms such as Pacific Century Regional Developments.

Between April and May last year, the company bought back 10.54 million shares at an average price of 20.8 cents apiece. It acquired a further 35.3 million shares at an average of 22.3 cents between June and August.

Then in December, it revved up the buyback programme again, venturing into the market to purchase 7.1 million shares at an average 23.4 cents apiece.

Its actions spurred other investors into taking an interest in its stock, helping push its price from as low as 19 cents last April to as high as 25 cents the following month – a gain of almost 30 per cent in less than four weeks.

Pacific Century then drifted to as low as 21.5 cents before getting a boost when it resumed buybacks in June. That hoisted its trading range to between 22 cents and 24.5 cents.

It later fell to as low as 19.5 cents before getting a fresh shot in the arm when share repurchases resumed in December, sending the price to 25 cents again at one point.

The importance that share buybacks now play in an investor’s psyche is reflected in the dismay they felt last week when the US central bank rejected Citigroup’s plea to increase payouts to shareholders.

Among the global lender’s proposals was a move to raise its share buyback from US$1.2 billion to US$6.4 billion.

Citi fell 5.4 per cent last Thursday on the news – its biggest one-day drop since November 2012.

It is a powerful demonstration that share buybacks are a fixture which investors can no longer do without – regardless of how well a company may be doing in its business.