One way to judge the quality of management is how the company rewards its minority shareholders.
Buying back the stock from shareholders is one way of returning the money to shareholders when company has limited growth opportunities.
Thread: Buyback of shares.
Buying back the stock from shareholders is one way of returning the money to shareholders when company has limited growth opportunities.
Thread: Buyback of shares.
Buyback is a process of returning the money to shareholders and cancelling the shares held by them, thereby reducing the number of shares issued. This is one way of distributing the surplus cash available with the company to shareholders.
Buybacks are done by management when the growth opportunities in core business are limited and the surplus funds are not generating enough ROE. The price set for buybacks are usually higher than the market price of the stock.
One indication of buyback is that management feels the stock is undervalued. This is more relevant in the case of stocks that have corrected sharply despite no apparent fundamental flaws. Buybacks lead to improvement in valuation of company theoretically.
Let us explain: Assume the company has 100 shares outstanding and net profit of company for current year is Rs. 900. The EPS turns out to be Rs. 9/share. Now company announces a buyback of 10% of its outstanding shares i.e. 10 shares.
Post buyback, company will have only 90 shares outstanding and Net profit of Rs. 900 would mean an EPS of Rs. 10 per share. Assume the market PE of company remains constant, this would translate into a gain of 11.11% in market price of share.
Buyback is an optional offer, Investor may or may not tender the shares held by them in the offer. This can however help promoters consolidate on increase their holdings without investing more money into the company. How? By not tendering their shares in the buyback offer.
How? Take above example: Out of 100 outstanding shares, assume 50 shares are held by promoters (i.e. 50%). Total shares after buyback are 90, his holdings will go up from 50% to 55.55% (50/90). So promoters were able to increase the stake without using any of their own money.
