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