Hi Glenn,
A fascinating question with buybacks coming as common as rain in Sydney! Its easy to understand why a company would buyback stock in a depressed market or if they are trading below their NTA but with much of the market trading at unprecedented valuations the logic isn’t as easy to understand. We can break down reasons why companies may prefer buybacks into four points:
- Buybacks are discretionary so a reduction at a later date isn’t taken as a sign of weakness as it can be with dividends.
- Buybacks can be more tax efficient for overseas investors who cannot enjoy the benefits of franking credits.
- Buybacks increase the EPS and can be a signal of management confidence that the stock is undervalued.
- Buybacks can give firms a method to return excess cash while keeping dividends steady, potentially useful in cyclical industries.
Another positive of a company doing buybacks is no major acquisitions or growth projects, with the potential requirement for capital raisings are around the corner. Buy-backs do make sense to MM, and they will drive higher per share earnings and thus higher dividends over time, with fewer shares on issue.
