Share Buyback - what it means and the implications

When a company initiates buyback of its own shares, the news is often received in a positive light - that the company deemed its current market share price as undervalued.

Understanding the implications of share buyback of companies would help us make better investment decisions, as we seek to delve deeper behind the action and how it changes the face values of the various metrics.

  • Does the company genuinely think that its share price is under-valued? 
  • Does the company believe in its future earnings and growth such that it would rather invest in itself rather than invest elsewhere or pay down debts with the spare cash? 
  • Or does the move spell alternate motives?

Summary of Shares Buyback implications

1) ROE* (return on equity) and EPS (earning per share) are artificially inflated (manipulated) to look good as outstanding shares in the market reduced.

2) ROA (return on assets) is artificially inflated because cash holding (part of assets) is used to buy back the shares and is thus reduced.

3) Share price may increase.
P/E gets artificially lowered and the other metrics now look better, so the post-buyback price seems 'cheaper' and that may trigger buying action from the market.

4) P/B is increased if point 3 turns out as predicted and as book value decreased.

5) Share buyback represents a future payoff to investors. Not present payoff.

*ROE can also be falsely high when company did not do re-evaluation of their fixed assets (which increase in value over time). When there is re-evaluation, it will increase stockholder's fund and generate a low ROE.

How to find out about buybacks?

We can view news of company share buybacks in SGX website under Company Announcements section or under Stock Facts of a particular stock where the right columns listed the recent events. The details (figures) can also be found under Financing Activities, cashflow or retained earnings statement in the company's financial report.

Interestingly, there is also an index that tracks the top 100 S&P500 stocks with the highest buyback ratios over the past 12 months and is rebalanced quarterly.

Some of the top holdings:
HCA Healthcare Inc (HCA) 1.24%
Corning Inc (GLW) 1.18%
United Continental Holdings Inc (UAL) 1.17%
IQVIA Holdings Inc (IQV) 1.17%
O'Reilly Automotive Inc (ORLY) 1.16%
Cigna Corp (CI) 1.14%
Southwest Airlines Co (LUV) 1.13%
Apple Inc (AAPL) 1.13%
Union Pacific Corp (UNP) 1.12%
Tractor Supply Co (TSCO) 1.12%
Express Scripts Holding Co (ESRX) 1.12%
Marathon Petroleum Corp (MPC) 1.11%
Cisco Systems Inc (CSCO) 1.11%
CSX Corp (CSX) 1.10%
Autozone Inc (AZO) 1.10%
W W Grainger Inc (GWW) 1.10%
Delta Air Lines Inc (DAL) 1.09%
Yum! Brands Inc (YUM) 1.09%
Walgreens Boots Alliance Inc (WBA) 1.09%
Target Corp (TGT) 1.08%
Ingersoll-Rand PLC (IR) 1.08%
F5 Networks Inc (FFIV) 1.07%
American Airlines Group Inc (AAL) 1.07%
Starbucks Corp (SBUX) 1.06%
Discover Financial Services (DFS) 1.06%
VF Corp (VFC) 1.05%
Nike Inc (NKE) 1.05%
Citigroup Inc © 1.04%
Anthem Inc (ANTM) 1.04%
HP Inc (HPQ) 1.04%
Aon PLC (AON) 1.04%
Verisign Inc (VRSN) 1.03%
JPMorgan Chase & Co (JPM) 1.03%
Regions Financial Corp (RF) 1.03%
ConocoPhillips (COP) 1.03%
Valero Energy Corp (VLO) 1.03%
Visa Inc (V) 1.03%
Charter Communications Inc (CHTR) 1.02%
Juniper Networks Inc (JNPR) 1.02%
Amgen Inc (AMGN) 1.02%
Textron Inc (TXT) 1.02%
Allstate Corp (ALL) 1.01%
Humana Inc (HUM) 1.01%
Walt Disney Co (DIS) 1.01%
Mcdonald's Corp (MCD) 1.01%

If we know the buyback ratio^ of a company, then we would be able to make more meaningful comparisons when choosing between same-sector stocks as we know how the buyback can artificially inflate some of their fundamental ratios. A bit of skepticism beyond what 'looks good' and some researching can often uncover more than what you have read in news.

^Related term: Buyback ratio
"The buyback ratio of the amount of cash paid by a company for buying back its common shares over the past year, divided by its market capitalization at the beginning of the buyback period."

References and good read:


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