Shares Buyback For Listed Companies

Listed companies buy back the company shares when they feel that the shares are trading at fair value or undervalued. The shares bought back by the companies can be used for the following purposes.

1. Write Off the Company’s Shares

By doing this, the total number of issued and paid up shares in the market will be reduced. This increases the percentage shareholdings of all shareholders, thus increasing the shareholder’s value.

2. Keep the Shares as Treasury Shares

Treasury shares is the portion of shares that a company keeps in their own treasury. Increasing the number of treasury shares allows the company to have a greater controlling interest within the treasury. This helps to ward off hostile takeovers and safeguard the interests of all shareholders.    

However, not all buybacks are good.

1. Improve the Company’s Financials

If the company merely buys the shares to improve financial ratios such as EPS or P/E, the buyback is detrimental to the shareholders. This type of buyback is against the interest of shareholders.

Shares buyback can be seen as a support for the share price. After the shares buyback, there is a high chance that the share price will increase. Investors look out for such buybacks to identify the potential companies to invest in. 

Case Study 1: Olam International Limited

The share price of Olam hit a low of $1.58 on 10th May 2016. From 16th May 2016, Olam starts to buy back the shares at $1.60. In less than 6 months, the share price of Olam goes to a high of $2.17 (achieved on 31st Oct 2016). This is a price gain of $0.57 (35.6%).

Case Study 2: Courts Asia Limited

The share price of Courts Asia was at the lows since 11th Feb 2016. The company then started the shares buyback and the lowest purchase price was $0.31 (on 8th Mar 2016). Since then, the share price of Courts Asia has been increasing and managed to achieve a high of $0.47 on 24th Oct 2016. This is a price gain of $0.16 (51.6%).  

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The mentioned stock should not be taken as an advice to buy or sell. Each user should go through with his usual self-analysis of his risk appetite and perform additional due diligence before making any investment or trading decision. Your Trading Representative should be consulted before making any financial decision.