Corporate Securities Info
Shares buyback
By Raul J. Palabrica
Philippine Daily Inquirer
First Posted 14:29:00 09/05/2008
MANILA, Philippines -- It’s probably a sign of the times.
With share prices down, last week’s most significant activity in the stock market seems to be the shares buyback done by some listed companies.
Ayala Land, Universal Robina and Philex Mining, to name a few, bought their own stocks at half, or even two-thirds, their value at the start of the year.
And more companies are disposed to reprising their acts.
When sellers outnumber buyers, it’s inevitable for prices of stocks to go down. There is nothing in the economic horizon -- locally and globally -- that could encourage those with disposable income to invest their money in stocks.
Primarily, a shares buyback is resorted to for two reasons: first, to prevent the erosion of the stock price in the market; and, second, to send a strong message to financing institutions and investors about management’s confidence in the company’s future growth.
If a company is awash with cash and there are no capital-intensive projects in the pipeline, it makes good business sense to buy back its stocks when their price is low.
Cash-strapped stockholders and institutional investors that want to minimize their losses would only be too willing to unload their shares to bargain hunting issuer-companies.
CONSEQUENCES
The stocks purchased are recorded in the company’s books as treasury shares, or shares that maintain their value but do not have the features inherent to common or preferred shares, depending on their original form.
With that change in status, treasury shares are considered withdrawn from the totality of the company’s outstanding capital stock. They are not included in counting the number of shares needed to approve certain corporate actions.
In effect, the shares are temporarily “retired.” And because company funds are used to acquire treasury shares, no stockholder can claim the right to vote them or receive their dividends.
Stripped of voting rights, these shares are booked as properties or assets of the company whose values correspond to their purchase price.
Their voting and dividend rights will be restored only if they are sold for a reasonable price fixed by the board of directors, or declared by the company as property dividends.
When there is not enough cash or regular stocks to distribute as dividends, treasury shares -- treated as property -- may be used as alternative or additional dividends.
STOCKHOLDERS
Depending on the extent of their holdings, stockholders have mixed reactions to shares buybacks by their companies.
For major stockholders (read: those whose shares entitle them to membership in the board of directors), a buyback could prove beneficial in the long run.
A further erosion of the stock price in the market, with its adverse effects on investor perception about the company’s growth potentials, can be avoided.
Although “buy low and sell high” is the mantra in stock trading, a price that looks very low compared to the stock’s earlier performance or runs counter to the company’s blue chip reputation could motivate nervous stockholders into unloading their shares, pronto.
When word gets around about that action, expect the others to follow suit. And the prices to tumble faster.
Also, a buyback gives rise to a strategic advantage to major stockholders in terms of control or influence in the decision-making process in the corporation.
As earlier pointed out, the acquired shares are deducted from the outstanding capital stock, or the number of stocks that is used as basis to determine the percentage of votes needed to validate certain corporate acts.
MINORITY HOLDERS
The more shares are bought and “retired,” with the major stockholders holding on to their shares (as is usually the case), the higher becomes the latter’s voting percentage in the company.
Without doing anything, much less shelling out money, the major stockholders are able to effectively increase their control in the corporation as the number of stocks entitled to vote is reduced.
If only for this effect, the major stockholders will go all-out for stock buybacks.
So where does that leave the small stockholders or investors who look to their stocks as an opportunity to profit from an increase in share prices?
For small stockholders who treat their investments as part of their retirement nest, they can simply sit back and pray that the buyback will bring in the expected beneficial results.
Hopefully, when they decide to leave the rat race for good, the value of their stocks has appreciated enough to realize substantial profits from their sale. Or the company’s finances have significantly improved to enable it to declare cash dividends that can help meet their expenses.
For investors with short-term plans who want to limit their losses, they can opt to include their shares in the buyback program and accept whatever payments may be offered.
It would be futile to ask for a buying price higher than what the company may have announced.
If the company accedes to the request, it would have to offer the same price to all other stockholders. The unrestricted retained earnings that the law requires to be used for buybacks may not be able to meet the added cash out.
Under these circumstances, the investors concerned may have no choice but wait things out and sell their shares when their price go up, no matter how small.
For feedback, please write to rpalabrica@inquirer.com.ph.
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