What Investors Should Know About Share Buybacks By Singapore Stocks In 2017

A company can do a few things with the free cash flow it churns out every year. It can reinvest the money into its business, use it to pare down debt, pay dividends to shareholders, or buy back its shares.

There are a few reasons why companies want to buy back their shares. Some companies might do so to support their share price. By reducing the number of shares outstanding, the earnings per share will increase. This causes the price-to-earnings ratio to fall due to a larger denominator. The share price should then rise as the market perceives the share price as cheaper than before the repurchase.

In 2017, 82 Singapore-listed companies bought back their shares, spending a total of S$425 million, according to a recent report by Singapore Exchange Limited (SGX: S68). In December 2017 alone, 27 companies repurchased a total of 28.3 million shares for some S$43 million. This marked one of the largest repurchases for the year. Other months in 2017 which saw a considerable amount of share buybacks taking place were August, June, and May.

Local banking giant, Oversea-Chinese Banking Corp Limited (SGX: O39), accounted for slightly more than half of the S$425 million in share buybacks that occurred in 2017. Keppel Corporation Limited (SGX: BN4), Silverlake Axis Ltd (SGX: 5CP), and Yanlord Land Group Limited (SGX: Z25) were the next in line behind OCBC.

Compared to 2016, share buybacks in 2017 were lower. In 2016, companies bought back S$826 million worth of shares, and this corresponded with the Straits Times Index (SGX: ^STI) ending the year flat. As some of you may know, the index rose 18.1% in 2017 to end at 3,403 points. Although we only have two data points so far, it’s interesting to note that Singapore companies were buying back more shares when the index was lower.

Warren Buffett is a huge advocate of companies buying back shares – if done for good reasons. And that is, if the company’s shares are undervalued, and the reinvestment opportunities into the business are not as attractive. Buffett also believes that share buybacks can reveal a thing or two about a company’s management. He once said:

“What you’d like to do as an investor is hook them up to a machine and run a polygraph to see whether it’s true. Short of a polygraph the best sign of a shareholder-oriented management — assuming its stock is undervalued — is repurchases. A polygraph proxy, that’s what it is.”

Check back for more on share buybacks over the course of 2018.

You can also keep up to date on the latest financial and stock market news by signing up now for a FREE subscription to The Motley Fool's investing newsletter, Take Stock SingaporeIt will teach you how you can grow your wealth in the years ahead too.

Also, like us on Facebook to follow our latest hot 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. The Motley Fool Singapore has recommended shares of Singapore Exchange Limited. Motley Fool Singapore contributor Sudhan P owns shares in Singapore Exchange Limited.