Share buybacks by corporations - in whose interest ?

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Over the past three years since 2016, there has been a marked increase in the number of announcements of share buy-backs from ASX listed companies. Buy-backs are where a stock exchange listed company literally makes an offer to purchase its own shares from its shareholders thus reducing the number of shares on issue in the market. This approach has often been in tandem with a company having excess capital or funds available to it as a result of the sales of other businesses (where there are other brands which the company can offload) or capital raisings which are no longer needed or a high return from business operations in the preceding year. But how sensible are share buy-backs and in whose interest do they occur ?

The oft stated justification from companies is that a buy-back creates value by reducing the number of shares on issue and are a way of returning capital to shareholders.  Little other information ever eventuates such as the overall rationale for the decision - what is the target price being sought ? What is the intrinsic value per share ? What is the timeline for the buy-back ? Some of the announced buy-backs have also resulted in little to no actual share purchases occurring hence the tactic appears to be for other reasons - such as placing a floor underneath the price of shares particularly if short sellers have been active in the market.

A raft of companies have been doing these buy-backs including CSL, Qantas, AGL, Navitas, CSR, Oroton, Platinum Asset Management, Cardno, QBE to name a few.

Management consultancy, McKinsey & Co, has challenged the value of share buy-backs in terms of using it as a method of improving earnings-per-share (EPS) or total return to shareholders (TRS), both of which are key revenue measures of a company's performance. McKinsey's have noted in one example that a company had pursued an aggressive share buy-back over several years and reduced around 20% of the share capital on issue and thus increased its earnings per share by 8% yet the overall net income for the business had continued falling. The overall revenue situation remained poor and the market discounted the company's shares by 40% relative to the market index. McKinsey's also commented that companies rarely time their repurchases well.

Shareholders would be well-placed to question the value of a company using investment capital or worse, debt financing, for share buy-backs rather than being used for revenue generation or 'growing the business'.