How to avoid a share buybacklash
In this issue:
- Navigating the share buyback minefield
- Will data centres save Singapore’s stock market?
Good morning, BT readers.
“Buybacklash” isn’t a word, but it should be, given how controversial share buybacks are.
Long seen as a way to manipulate the market, share buybacks have actually been outlawed for much of the 20th century. In the US, the practice has only been legal since 1982. It would take another 16 years for companies in Singapore to be allowed to buy back their own shares.
Since then, companies worldwide have made up for lost time with gusto. By 2018, almost half of non-US companies were conducting share repurchases.
Today, share buybacks have been around for as long as our oldest and grumpiest millennials, but just as with millennials, no one can agree on whether they are good for business. US Senator Elizabeth Warren regards buybacks as “nothing but paper manipulation”. On the other hand, billionaire Warren Buffett famously eschews paying dividends to Berkshire Hathaway investors and favours buybacks instead. Now, DBS’ gargantuan share buyback move has revived the debate over the practice. While there remains little consensus on the matter, there are ways that companies can mitigate the backlash from buybacks.
What’s happening?
Earlier this month, DBS announced a S$3 billion share buyback programme on a superlative-filled day – earnings were at a record high and its share price soon followed suit on the news.
As the market digested the news, BT’s explainer piece came in handy for investors contemplating the buyback’s implications on earnings per share and return on equity.
Digestion soon morphed into heartburn when the bank disclosed that its CEO Piyush Gupta had sold 300,000 shares in two tranches after DBS announced its earnings and buyback programme.
The unfortunate timing was, as BT’s Mark to Market columnist Ben Paul put it, not a good look. Share buybacks are often intended to signal that a firm’s shares are undervalued. But when the company’s CEO sells them at around the same time – with the share price near record highs, no less – it’s not clear what investors are supposed to believe.
Why it matters
Berkshire Hathaway might be a dab hand at buying back shares at the right price and for the right reasons, but we can’t all be Warren Buffett.
If you are a manager intent on “ownself buying ownself” despite not being a nonagenarian financial genius, here is how to navigate the post-buyback landscape.
1. Don’t sleep on dividends:
If a firm is adding share buybacks to its existing array of ways to return capital to shareholders, by golly, both pistons – dividends and buybacks alike – had better keep pumping. Math-wise, whether a company buys back shares or pays out dividends instead makes no difference to the firm’s underlying value – only the mix of shareholders changes.
Fittingly then, BT senior correspondent Leslie Yee is indifferent towards how firms return money to shareholders, especially when buybacks improve the odds of higher dividends per share down the road.
Even so, many local retail investors are “dividend-fixated”, he noted. Old attitudes die hard. DBS must know this and has made the appropriate reassuring noises. Its CEO, Gupta, said earlier this month that the bank still has a lot of capital to return. Even after the buyback, the bank will still have S$3 billion to S$5 billion of excess capital coming out its ears. “So we’re going to have to use all three engines, which are step-up dividends, special dividends, as well as buybacks to the extent that we can,” he’d said.
2. Be careful about timing share buybacks…
“Most companies repurchase too much stock when the stock price is relatively high and not enough when it’s low,” a 2019 report by Fortuna Advisors noted.
To combat poor timing, having a buyback measurement and review process is key. BT’s Mark to Market column suggests that firms provide an estimate of their shares’ intrinsic value and make explicit the valuation below which a share buyback would make sense.
“..a clear statement from the company’s board on the matter would make it accountable to its shareholders, and provide the market with a useful guidepost on how to price the company’s shares,” the column said.
Also, there is no shame in emulating the average Boglehead retail investor – the Fortuna report does not rule out the dollar-cost averaging approach in order to “minimise poor repurchase timing”.
3. …and equally careful about timing executives’ share sales
An obvious solution would be to bar the top brass from selling their shares during the company’s buyback programme, BT’s Mark to Market column argues.
As it is, a 2018 study by the US Securities and Exchange Commission (SEC) found that insiders are twice as likely to sell their shares on the days following a buyback announcement compared to the period before it.
This is about more than mere optics. Robert Jackson, then an SEC commissioner, had argued in 2019 that “insider selling on buybacks is associated with worse long-term performance”.
Jackson had pushed for better oversight of insider transactions. “If executives will use the buyback to cash out, the (compensation) committee should be required to approve that decision and disclose to investors the reasons why it is in the company’s long-term interests,” he’d said. Some insider share sales might inevitably overlap with corporate manoeuvres, but a concerted effort by the firm to explain these moves might alleviate shareholder side-eye.
For corporations, share buybacks are a bit of marvellous alchemy. The practice juices key metrics and can be scaled up and down without upsetting dividend-watching investors. But they do open up a whole new flank at which market watchers can take aim.
In which case, buyer (of own shares), beware.
The big number: US$3 billion
The South-east Asian region raised this piddling sum in 2024 – the lowest in almost a decade – a Deloitte study found. In Singapore, this has been a year to forget as well, with only four initial public offerings (IPOs) raising a total of US$34 million.
2025 might be better. Regulators’ market rejuvenation attempts and a renewed focus on real estate investment trusts (Reits) in Singapore could make for robust growth next year, reckons Darren Ng, transactions accounting support partner at Deloitte Singapore.
Data centre Reits, in particular, might shake some lethargy out of Singapore’s IPO market. Japan’s Nippon Telegraph and Telephone Corp (NTT) might come a-calling with a global data centre Reit that might raise as much as US$1 billion late next year. More interest rate cuts, expected around the same time, will make for better equity valuations.
If nothing else, Singapore knows what to do with its data centre Reits. The ones already listed here were the standout performers amongst Reits during the latest earnings season, posting “exceptionally strong” rental reversion figures.
So, NTT, call us maybe definitely.
(Disclosure: I own shares in DBS and data centre Reits.)
5 big reads
- Souring S&P 500 profit outlook a bad sign for stock market rally Stocks are being “set up for a reversal”.
- Home prices set to rise in Hong Kong, Singapore, Australia in 2025 After a drop in Q3 of this year, prices in Singapore should rise as interest rates fall.
- Trump 2.0 a hurdle for S-Reit investors hoping for fast rate cuts There may be some level of fatigue among investors who are tired of waiting for Reits to turn around, but it could pay to stay invested.
- Wealth hubs go on charm offensive to lure UK super-rich “Rich people have choices.”
- Hong Kong property tycoons plough money into rebounding IPO market Their support could help fan the flames of a nascent recovery.
