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, in turn, 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 to be cheaper than before the repurchase.
In June this year, 74.6 million shares were repurchased by 33 companies for a total amount of S$174 million, according to a recent report by Singapore Exchange Limited (SGX: S68). This marked one of the largest repurchases since September 2015. This year, the highest buyback consideration was in March 2018, where S$222 million worth of shares were bought back.
The June buyback consideration was up 26% from the figure recorded in May 2018 while the Straits Times Index (SGX: ^STI) fell 4.7% in the month of June. Although we only have two data points, it’s interesting to note that Singapore companies were buying back more shares when the index was lower.
The top seven buybacks in terms of total consideration were all dominated by blue-chip stocks. In the order of ranking, the companies are CapitaLand Limited (SGX: C31), United Overseas Bank Ltd (SGX: U11), Keppel Corporation Limited (SGX: BN4), Oversea-Chinese Banking Corp Limited (SGX: O39), SATS Ltd (SGX: S58), Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6) and Venture Corporation Ltd (SGX: V03). CapitaLand clawed back a total of S$60.8 million worth in shares from the stock market while Venture bought back S$5.7 million.
The eighth, ninth and tenth spots were taken up by Wing Tai Holdings Limited (SGX: W05), Silverlake Axis Ltd (SGX: 5CP) and Q & M Dental Group (Singapore) Limited (SGX: QC7), respectively. Wing Tai repurchased a total of S$4.5 million worth in shares while Q & M Dental bought back S$3 million.
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.”
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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, United Overseas Bank Ltd and SATS Ltd. Motley Fool Singapore contributor Sudhan P owns shares in Singapore Exchange Limited and SATS Ltd.