Timing of DBS share buyback announcement and its CEO’s share sales was not a good look

SOME investors may have had mixed feelings about DBS chief executive Piyush Gupta selling 300,000 shares earlier this month, right after the banking group reported strong financial results for Q3 2024 and unveiled a S$3 billion share buyback programme.

Share buybacks are often taken as a signal from a company’s board and management that its business is thriving, and that its share price might be too low. Yet, one could argue that the sale of shares by a company’s CEO sends the opposite message.

It did not help that DBS shares soared immediately after the earnings report and the share buyback announcement on the morning of Nov 7, while the disclosure of Gupta’s sale of DBS shares came only on Nov 11 – creating the sense that he had benefited from the excitement about the share buyback programme.

The filing on Nov 11 showed that 100,000 shares in which Gupta held a deemed interest were sold on Nov 7 at an average price of S$41.7513, and that a further 200,000 shares were sold on Nov 8 at an average price of S$42.2023.

DBS closed on Nov 7 at S$41.70, up more than 6.5 per cent from the previous day’s close. It climbed a further 1.7 per cent on Nov 8, to close at S$42.40.

While this was not a good look for DBS, some context might be useful.

In the first place, DBS was not the only bank stock that rallied recently. Its peers OCBC and UOB also shot up after reporting strong Q3 2024 financial numbers, and commenting about their own capital management plans.

The three banks are the biggest components in the Straits Times Index, and their rally came amid a surge in global investor sentiment following Donald Trump’s election victory in the United States.

Trump is expected to pursue a range of policies that may stoke inflation and slow the pace of rate cuts by the US Federal Reserve, which could be positive for net interest margins of the three banks.

Moreover, CEOs of public listed companies receive a large portion of total compensation in the form of shares, and they are restricted to selling only within certain windows. Hence, the sale of their shares from time to time is only to be expected, and may not necessarily reflect any bearishness on their part.

In fact, DBS shares continued climbing after Gupta’s sale was disclosed. The stock closed Friday (Nov 15) at S$42.94, up nearly 1.3 per cent for the week.

This was despite DBS shares trading ex-dividend on Nov 14, for an interim payout of S$0.54 per share.

Risks related to buybacks

Nevertheless, corporate boards and market regulators should study this episode, and look into ways to improve the rules and practices related to share buybacks and share-based compensation.

Unlike dividend payouts, share buybacks return cash only to shareholders who choose to exit. Shareholders who hold on to their shares ostensibly stand to benefit from an increased share of the company’s future earnings.

This column has previously pointed out, however, that companies conducting share buybacks rarely explain how they determined that continuing shareholders are obtaining the increased share of those future earnings at an attractive price.

To put it more simply, companies do not explain how they came to the conclusion that the shares they are buying back in the market offer good long-term value.

Worse, companies tend to have the inclination and financial capacity to pursue share buybacks after a period of strong financial performance – when their share prices might already be elevated and their businesses might be on the brink of a cyclical downturn.

Indeed, DBS shares have been hitting new highs on the back of record earnings, as interest rates rose over the past couple of years.

During the first nine months of 2024, the group reported a return on equity (ROE) of 18.8 per cent. Back in 2019, DBS reported a much lower ROE of 13.2 per cent.

The tailwind of rising interest rates is now waning, though. Earlier this year, DBS indicated that it is targeting an ROE of between 15 per cent and 17 per cent going forward.

The tension between continuing shareholders and exiting shareholders during a share buyback programme would naturally be amplified if the company’s own directors or senior managers are among the shareholders who choose to sell their shares.

In these instances, continuing shareholders may question whether their company is repurchasing shares at an attractive price, or whether the share buyback programme is only helping to create liquidity for shareholders who are selling out.

Fixing the problem

One obvious solution is to simply prohibit directors and senior managers from selling shares until their company’s share buyback programme is safely over.

Another solution is to require companies seeking share buyback mandates to provide an estimate of the intrinsic value of their shares, and state the valuation below which buying back their shares would be in the interest of continuing shareholders with a reasonably long investment horizon.

Some shareholders may have very different views on the right price at which to pursue a share buyback programme, of course.

Still, 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.

It would also put the onus on individual directors and senior managers to explain their own share sales.

This brings me to the subject of top executives receiving a big portion of their total compensation in the form of shares.

A company’s most senior managers should certainly be expected to have a major slice of their net worth invested in its stock, in my view.

Once these top executives are already heavily invested, however, I wonder if paying them mostly with shares year after year will motivate them to work any harder, or align their interests any more firmly with those of the company’s shareholders.

The way I see it, receiving a very substantial portion of their total pay in the form of shares may just turn them into sellers of those shares over time, especially if those shares were to underperform the market for some reason.

To be clear, I am not suggesting that the policies on executive pay adopted by DBS and its peers are not working. With changing economic and market conditions, however, it could be time to review those policies and ensure they are still fit for purpose.