Skip to main content

Share Buybacks

 

Buybacks are just the opposite of share issues. While a company raises money from the public when it issues shares, at the time of a buyback it pays its shareholders in order to reduce the number of its shares outstanding.

 

The motives


Companies buyback their own shares for a variety of reasons. The first is to instil confidence in their shareholders when its share price is witnessing a free fall. With this step, the company's management tries to convey the message that the company's shares are available at a discount compared to its intrinsic value. And since the management has confidence in its company, it is using the cheap valuations to buy up shares. The freefall could be happening for any reason. For instance, during 2008 the share prices of a lot of companies had fallen to very low levels because the macro-environment as a whole was bleak then.

 

The other reason why companies go for buybacks is to increase the value of their shares. Since buybacks are done at a premium (to prevailing market price), investors who want to sell out get a good price. Meanwhile, the number of outstanding shares gets reduced. This results in higher earnings per share (EPS) on same level of profits. This usually drives the company's share price up, thereby rewarding existing shareholders. Sometimes companies also engage in buybacks as a means of deploying their excess cash holdings. Various studies have shown that when a company with excess cash goes on an acquisition spree, in the majority of cases it fails to create shareholder value. Thus, besides paying out dividends, buybacks are a good way of rewarding shareholders. At times a buyback is also done in order to reduce the dilution caused by generous employee stock option plans (ESOPs) and warrant conversions.

 

The bottomline

What needs to be remembered is that a buyback helps shore up a company's share price only if its fundamentals are sound. Otherwise the buyback provides only temporary support and its stock price and its effect soon wears off.

 

A catch with many buyback programmes is that they are announced but not implemented right away, making it difficult for existing shareholders to benefit from them. Existing shareholders should decide to avail a company's buyback offer based on their assessment of its prospects. If these are sound, they should stay on as they too stand to benefit from the buyback.

 

Popular posts from this blog

ICICI Prudential Balanced Fund

 ICICI Prudential Balanced Fund scheme seeks to generate long-term capital appreciation and current income by investing in a portfolio that is investing in equities and related securities as well as fixed income and money market securities. The approximate allocation to equity would be in the range of 60-80 per cent with a minimum of 51 per cent, and the approximate debt allocation is 40-49 per cent, with a minimum of 20 per cent. An impressive show in the last couple of years has propelled this fund from a three-star to a four-star rating. The fund has traditionally featured a high equity allocation, hovering at well over 70 per cent, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79 per cent levels to 66-67 per cent of the portfolio. ICICI Prudential Balanced Fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked i...

TDS Rate and Personal Account Number(PAN)

    The TDS rate doubles to 20% from 10% if you fail to mention your Personal Account Number   IF you run a glance through your pay slip, you will come across something called TDS, which is tax deduction at source. In most cases, the employer deducts this amount at the time of payment of salary itself and pays the total tax amount to the government on behalf of all the employees. If you are a self- employed or practicing professional s, you have to pay this amount yourself.    Tax deducted at source is one of the modes of income tax collection by the government. Under the income-tax laws, income tax at specified rates is required to be deducted while making certain payments.    The rate of deduction of tax at source on interest and rent payment is 10%. For salary payments, the employers deduct income tax at source on a monthly basis after computing income tax liability on estimated annual taxable income of the employee. Tax benefits on housing loan, investments, etc are consid...

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...

Fortis Mutual Fund

Fortis Mutual Fund, a relatively new player, it is still to prove its case and define its position in the industry. In September 2004, it came onto the scene with a bang - three debt schemes, one MIP and one diversified equity scheme. And investors flocked to it. Going by the standards at that time, it had a great start in terms of garnering money. Mopping up over Rs 2,000 crore in five schemes was not bad at all. The fund house has not been too successful in the equity arena, in terms of assets. Though it has seven equity schemes, it is debt and cash funds that corner the major portion of the assets. Most of the schemes are pretty new, and the two that have been around for a while have a 3-star rating each. The last two were Fortis Sustainable Development (April 2007), which received a rather poor response, and Fortis China India (October 2007). Fortis Flexi Debt has been one of the better performing funds, after a dismal performance in 2005. It currently has a 5-star rating. None ...

Birla Sun life Fixed Term Plan Series roll over

  The fund house has also decided to roll over the maturity date of Birla Sun life Fixed Term Plan Series LO for 773 days. The scheme shall now mature on July 20, 2017 against the previous June 08, 2015. Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara Robeco Equity Tax Saver 8. IDFC Tax Advantage (ELSS) Fund 9. Axis Tax Saver Fund 10. BNP Paribas Long Term Equity Fund You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds Invest in Tax Saver Mutual Funds Online - Invest Online Download Application Forms For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call --------------------------------------------- Leave your comment with mail ID and we will answer them OR You can write to us at PrajnaCapital [at] Gmail [dot] Com OR Leave a ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now