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Share buybacks' uptrend tapers off

Analysts reckon buybacks may not necessarily be the best use of a listed company's cash and may not work well in holding up share prices
Monday, March 16, 2015 - 05:50
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Share buybacks by listed companies have tailed off since the start of the year after a surge in December, which analysts have said may be a good thing for shareholders.

Singapore

SHARE buybacks by listed companies have tailed off since the start of the year after a surge in December, which analysts have said may be a good thing for shareholders.

Share buybacks may not be the best use of a company's cash and may not be very effective in propping up share prices, they said, though they added that shareholders might still view a well-defined share buyback strategy positively.

The monthly total value of share buybacks fell to S$97.2 million in January and S$41.9 million in February. For the first week of March, about S$25.1 million worth of shares were bought back, according to figures from the SGX My Gateway investor portal.

The latest figures represent a fairly sharp decline from the peak of S$262.2 million in December last year. Prior to that, the total value of shares bought back had been growing steadily every month, from S$69.3 million in September to S$96.6 million in October and then to S$137.4 million in November.

Listed companies usually buy back shares on the open market when they think their stock is undervalued. Blue-chip firms often buy back stock as treasury shares so they can issue them to staff as part of performance incentives.

Firms may also buy back shares to cancel them, in order to prop up their stock price or engineer better financial ratios such as earnings per share, which grow bigger if the number of outstanding shares shrinks.

NRA Capital executive chairman Kevin Scully said that the recent decline in share buybacks could be a matter of timing. "Listed companies who undertake normal share buybacks must be aware of insider trading, so most follow the code of corporate governance and try not to be active just ahead of any results announcement or other price-sensitive announcement," he said.

"This could explain the seasonality in January and February because of the full-year 2014 year-end and fourth-quarter reporting season."

The company with the most share buybacks over the six months from September to February has been casino operator Genting Singapore, which has been cancelling those bought- back shares rather than putting them in its treasury.

The runner-up is OCBC, followed by Pacific Century Regional Developments, the investment holding company controlled by billionaire Richard Li, the younger son of Hong Kong tycoon Li Ka-shing.

Pacific Century is very near the maximum number of its shares it is allowed to own. Companies listed here are limited to holding 10 per cent of the total number of their shares issued, and Pacific Century held 9.99 per cent of its stock as at March 6, according to an SGX My Gateway report.

Some analysts said that share buybacks might send the signal that managements have run out of better ways to deploy capital.

"If management is unable to re-commit excess capital to grow, explore and develop new opportunities for the business, and thus resorts to buying back stock, that should be perhaps challenged," said CMC Markets analyst Nicholas Teo.

He added that even though buying back shares to use them as employee performance incentives would be a more valid reason than financial engineering, it can still be called into question. "A lot of these employee options may also include a skewed amount going towards executive compensation. The same executives may be the ones who determine when and at what prices these buybacks occur. This is a practice that should be policed better and questioned by minority shareholders."

Mr Teo also said that share buybacks usually provide only temporary support to prices and market forces eventually prevail.

However, other analysts said that using cash to buy back shares could be seen as good corporate governance by shareholders.

"Share buybacks are really a form of returning excess funds to shareholders. This effectively reduces financial slack, which is a form of improving corporate governance," said Voyage Research head Roger Tan.

He noted that companies may buy back shares to give themselves more flexibility in potential mergers and acquisitions. "In times of low valuation, a company can choose to buy back shares so that they can use it for M&A payment alternative when prices are higher."

Mr Scully added that a company with a "well-articulated buyback strategy" may appeal to shareholders. Such a strategy may involve buying back shares for employee stock options or using surplus cash to boost earnings and net asset value per share. "It shows that management is aware about the share price and dilution issues for existing shareholders. The buyback can also provide a floor price for the shares if it is under active shorting or price pressure."

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