Strategy: Buy or bye on share buybacks?
For the first half of Jul, there was a sharp pickup in share buybacks conducted by 22 companies, totalling 63.3m shares with an aggregate consideration of $42.8m.
This was up from 7.3m shares and total consideration of $23.3m in the same period last year.
The five stocks with the largest buybacks were Genting Singapore, Pacific Century Regional Developments, Noble, ST Engineering, and Straco.
As a guide, re-purchased shares are generally converted into treasury shares, thereby reducing the company's free float. Subsequently, management can choose to either cancel these shares which would reduce total issued shares, or re-issue them for other purposes, ie.employee share awards, etc.
Share buybacks are generally viewed positively because:
1) Earnings per share should increase on a reduced share base;
2) Potentially point towards privatisation if the owner controls a majority stake;
3) Act as a share price support.
However, they may may also be seen to destroy value if:
1) There is no alternative use for excess cash;
2) The company is forced to buy back shares after coming under an attack by an external party causing share price to tumble, especially when there is no support from majority shareholders
Investors are advised to look into the reasons behind share buybacks before making the jump into the stock.