These Companies Are Buying Back Their Shares – Should We Be Buying Too?

With Singapore’s stock market barometer the Straits Times Index (SGX: ^STI) having fallen by 12% over the past three months, some companies have started  – or increased their pace of – buying back their own shares in the open market.

Here are some companies that have been engaged in buy backs these past few weeks:

Some in the list – such as DBS – have been repurchasings shares on a regular basis every month for this year. Meanwhile, others like Keppel Corp have been quite selective when it comes to share buybacks; prior to its recent bout of purchases in August, Keppel Corp was only repurchasing its shares at the end of last year and June this year.

There are a few reasons why a company may want to buy back its shares. Here’s two.

Reduce dilutive effects

Some companies might have outstanding financial instruments which can dilute the stakes of existing investors. Such instruments include share options for employees, convertible bonds, and warrants.

When the dilutive financial instruments are exercised, new shares would have to be issued by such companies. If their management teams want to maintain the outstanding share count, then the companies would have to engage in share buybacks to offset the number of new shares that can be created.

The shares are cheap

Another obvious reason why a company might be buying back its shares is because management feels that its shares are undervalued.

Management may be wrong in their assessment of how cheap their company’s shares are, but such situations are worth digging further into. When a company’s management team thinks its shares are cheap, it pays to sit up and take notice.

Foolish Summary

Some of the companies listed above might be buying back their own shares because their management team thinks their shares are cheap. It’s our job to figure out which ones are.

For more investing insights and analyses, you can sign up for The Motley Fool's free weekly investing newsletter Take Stock Singapore. It's FREE, so do check it out here.

Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns shares in Keppel Corporations and Wilmar International.