Thursday, September 09, 2010

Further Discussion On Share Buybacks

A reader, who also has a decent business blog, made comments on share buyback. They deserve some discussion.

Jessica C



AhYap.com has left a new comment on your post "Share Buybacks Revisited":

I thought--

Treasury shares (shares bought back by company) are not not included when calculating the non diluted eps. So the eps will increase. And because treasury shares are not subjected to dividend, dividend to shareholders are suppose to increase.
(Its not that they do not get the dividends, they do, its just that the dividends go straight back to the coffers, so you cannot argue that they are not subjected to dividends).

Share buy back allows company to control market price if it is too undervalue, or in the US when market price is attached by short sellers making fake news.
(There are no short selling in Malaysia, so why go on share buyback then. In the US, too much emphasis is paid to share price as a CEO's compensation and bonus are usually tied to share price movements, hence they have more propensity to boost share price by doing buybacks and canceling the shares. To me, that is short sighted as the CEO only wants to move share price but usually at the expense of investing excess funds for the long term. Your argument on short selling does not make sense as short sellers would not target an undervalued counter).



Stocks that has been bought back can be distributed back to shareholders and immediately increasing shareholder value because each shareholders now own more of the company.
(I agree).

Buying back shares is the same as paying back dividends in some sense. Buying back shares is more meaningful if the share is believed to be undervalue. But a shareholder who think the stock is undervalue and receive cash dividend can easily repurchase the stock in the open market.
(Management is paid to run a company, to grow it. If you have access funds and you do not know what else to do with it, then give it back to shareholders, let the shareholders decide what to do with the funds because the management obviously has no better ideas. You cannot just simply buyback shares because you think its undervalued - my thesis is that management has to work harder to make the money work and not take the easy way out).



Different is if company buy back shares, it send out strong signals to the market on what management think about the stock price. And company share buy back has bigger volume to support share price as compared with individual shareholder who try to buy with their cash dividend.
(Wrong again, look at the number of companies that have been buying back shares, the whole perception of the company has not really changed, except for a select few. Look at Mulpha, Bolton, Ebworx, Lien Hoe, Degem, Dialog, Eng Teknologi, Brem Holdings, Integrated Logistics, Ralco, Rexit, Sunchirin, VSI, Tekala .... how has it improved perception???? The few that have done so, successfully, are few in between, Delloyd, QL, Mudajaya, MFCB, Latexx and MTD Capital. What I am getting at is too many of them are not addressing deeper problems within, and always just blame the market for undervaluing them).

Cancellation of treasury shares are not a wise move for small cap companies that need liquidity. It is wiser to distribute to shareholders. Big companies are welcome to cancel shares.
(If you need liquidity, why buyback shares in the first place??? Why reduce free float of your already small cap???)

Even if treasury shares are not canceled, selling them when the market price is higher will make company money and increasing shareholder value.
(This is very bad management. They are paid to run the business, not to trade in their own shares. Even if they make a profit, any analyst worth their salt will ignore the gains because its non recurring and exceptional. No matter how you cut it, trading in your own shares should never be part of your business model).

Those shares can also be used for acquisition without the need to issue new shares that will dilute shareholders value.

The treasury shares can also be sell in bulk to potential institution investors that need a big volume that buying in market is difficult.
(This I agree totally).

I have full support for share buy backs.

(Again, I stress that I am not against share buybacks, I am against management NOT addressing deeper issues within the company. A company does not stay undervalued if they do all the right things, they ......
need to ask themselves more questions as to why their share price is not at a level where it should be – are investors not happy with the management’s vision; is the company not communicating its plans effectively; has the company not been able to chart a credible track record; have the financial results for the company been haphazard or inconsistent; is the company too unfocused or too diverse that nobody even wants to follow/research the company; how is the management track record been in treating minority shareholders; have transactions or deals been really fair to all shareholders or been forced down investors’ throat (oops, getting too specific here) – chances are the stock will be rated properly if the above concerns have been addressed. Hence most share buybacks will not be entirely successful as it is fighting against the “enemy” when the “enemy” is really internal not and not external).

15 comments:

AhYap.com said...

Wah, my English has so many spelling and grammar mistakes, help to correct correct a bit mar :P

Yes, it is absolutely right that if a company has internal problems, buying back shares won't solve it at all.

> Your argument on short selling does not make sense as short sellers would not target an undervalued counter

I am more familiar with oversea stocks so I mentioned about short selling. It is to my surprise that short sellers are not targeting over value stocks. Over value stocks can be over value and become even more over value later! It is hard for short sellers to game on them.

Short sellers target WEAK and SMALL CAP company. They usually create FEAR to make their stunts and cash in and move to another weak and small cap. But this is a topic on it's own.

Again it is back to management intention for share buybacks and their honest review on their own company problems. There are many times everything is so right for share buybacks but management never seems interested in it. Do you agree with PBBANK share buybacks? They already doing everything right and I think the share buybacks is another extra right thing if done at 'correct' market price.

Another one is HAIO. I only know that few stocks. :P never spend too much time on those that have "internal problems" to start with. haha. Better ask Ze Moola on problematic stocks.

AhYap.com said...

Wah, my English has so many spelling and grammar mistakes, help to correct correct a bit mar :P

Yes, it is absolutely right that if a company has internal problems, buying back shares won't solve it at all.

> Your argument on short selling does not make sense as short sellers would not target an undervalued counter

I am more familiar with oversea stocks so I mentioned about short selling. It is to my surprise that short sellers are not targeting over value stocks. Over value stocks can be over value and become even more over value later! It is hard for short sellers to game on them.

Short sellers target WEAK and SMALL CAP company. They usually create FEAR to make their stunts and cash in and move to another weak and small cap. But this is a topic on it's own.

Again it is back to management intention for share buybacks and their honest review on their own company problems. There are many times everything is so right for share buybacks but management never seems interested in it. Do you agree with PBBANK share buybacks? They already doing everything right and I think the share buybacks is another extra right thing if done at 'correct' market price.

Another one is HAIO. I only know that few stocks. :P never spend too much time on those that have "internal problems" to start with. haha. Better ask Ze Moola on problematic stocks.

AhYap.com said...

Another comment is that as you say, it is not "share buyback" that is the problem but it is the management.

Probably 90 out of 100 business management are not sided with the shareholders. Isn't that the reason why we need to cherry pick our investment out from the universe of stocks?

So you are correct in saying that share buybacks alone doesn't equal to "good news". Just like stock splitting (ahem kstar) as they are not addressing the real problem.

K C said...

This is a very interesting topic which I would like to chip in.Finance 101 says that the primary objective of public listed corporation is to maximize shareholders value. This seem to imply the duty of the management is to increase the share price of the company. This comes the argument of how should the management maximize the share price, and should the management have to succumb to the command of Mr Market, or should the management focus on the long term maximization of shareholders’ value as elaborated by Dali? My take is on the later that the management should focus on improving the business, not the short term share price. I agree with Ah Yap that share buybacks does increase the earnings per share as less shareholders enjoy the same earnings. If the total dividend to be distributed to shareholders stays the same, each shareholder will get more. I do not think that the treasury shares are also given dividends as it is a bit weird to consider the company as a shareholder of itself. However, I agree that not all share buybacks are good as deliberated by Dali at length because of the inherent agency problem in the corporate world, especially when management holds huge options of the company shares. This reminds me of the book I have read some time ago, The Conspiracy Theory: A true Enron Story (Kurt Eichenwald).

Sechai said...

There is no doubt that management should focus on delivering long term performance. However, many good managements are very bad when comes to managing cash flow generated from business operations. That's why Buffett has always played the role as a capital allocator.

Share buyback at an undervalued price is just a plus in creating shareholders' value. However, we must check that they are not creating huge share options on one hand and buying back shares on the other hand. It is just transferring wealth from the shareholders to senior management. Many US companies actually issue 1-2% new ESOS each year and then buyback 1-2% of it own shares in the following year. Which is highly value destructive.

kl said...

Share buyback is just a tool, and like any tool, can be used or misused by those who wield it. It's not the tool that does wrong but the wielder (of the tool) who is to be blamed for any wrong doing. As such, I have no issues with judiciously executed share buybacks by management if done in good faith for the universal good of all shareholders, and not done for the private agenda of management or controlling shareholder.

Gamelion said...

Still don't understand why there is
a need 4 such share buyback. If the companies have so much obscene cash that they don't know what to do about it; please just return to the shareholders in the form of higher dividend/ capital repayment !!!!!

The Emperor said...

My observation is that share buybacks have been abused by a few PLCs in that the bulk of the buying in a day is in the last half an hour to closing. Or it is concentrated in a 10-15 minute quadrant as if to take out long positions held by friendly parties. Please observe the unusual share price movements of two plastic packaging companies & a HDD component manufacturer.

The Emperor said...

Further to my earlier comment, my suggestion for share buybacks is to restrict buying activity to 20% of total daily volume, buying taking place an hour after the market has started (10am) and ending an hour before closing (4pm).

The Emperor said...

Further to my earlier comment, my suggestion for share buybacks is to restrict buying activity to 20% of total daily volume, buying taking place an hour after the market has started (10am) and ending an hour before closing (4pm).

DanielXX said...

A big reason for share buybacks is that management is heavily paid in options. So of course they will use company money to support the shares so that they can cash out later. Some might think this is alignment of interests with shareholders but if you think about it, when this money could have been better deployed as dividends to ALL shareholders instead of being used to support share price due to management PERSONAL agenda, this is actually a form of legalised embezzlement.

sim88one said...

Hi Salvatore Dali, I am seriously considering blogging career. Will you be kind enough to share your insights? Thanks in advance should you be willing to impart your knowledge. Cheers.

brotherlone said...

share buybacks by creating more demand in market will uplift share price. and if share prices moved up, isnt that rewarding shareholders?

only thing i've against share buyback is that it sucks up the free float.

emacro said...

'Friendly parties' of the management usually take u positions before the buy back, and when the action is put in place the price is ramped up to take out the sell orders of the 'friendly parties'. You only have to look at the mid 2000s so called share buybacks of a certain gaming company (now taken private)

There should be some rules on how the share buy back is done. As the assumption is the share price is 'undervaluing' the company's shares, share price should only be done if the price is trading below the past 5 days lowest low point. Learn from Benjamin Graham and do it in a Value Investing way.

emacro said...

'Friendly parties' of the management usually take u positions before the buy back, and when the action is put in place the price is ramped up to take out the sell orders of the 'friendly parties'. You only have to look at the so called share buybacks of a certain companies and the manner they do the buybacks by ramping up the share price.

There should be some rules on how the share buy back is done. As the assumption is the share price is 'undervaluing' the company's shares, share price should only be done if the price is trading below the past 5 days lowest low point. Learn from Benjamin Graham and do it in a Value Investing way.