Companies that have more cash surplus decide the share buyback. IT sector giants like TCS had recently announced a share buyback of 16 thousand crores and Wipro 9500 crores. Earlier in 2018 too, TCS announced a share buyback of 16 thousand crores. Under share buyback, the company buys back its shares in the market. The buyback reduces the number of shares of the company in the open market. The company does buyback because the number of shares available in the market increases due to the decrease in the number of shares in the open market and as a result the value of the shareholders also increases. This also increases returns. Shareholders get the advantage that companies buyback at a premium price (higher than the current share price).
Trust in the company increases
Analysts believe that unless the stock is undervalued, the decision to buyback should not be taken by the management. When a company decides on a share buyback, it shows that the company has sufficient capital. The buyback decision gives shareholders confidence that the company will benefit if it has more cash, rather than reinvesting it in any other assets.
TCS and Wipro have done buyback this month
TCS had decided to buyback at a price of Rs 3000 per share, while its closing price on that day (7 October) was Rs 2737 per share. Similarly, Wipro also had a buyback at a price of Rs 400 per share, while its shares closed at Rs 375.75 on that day (October 13). Apart from TCS, Wipro, Sun Pharma, Supreme Petrochem, Emami, Dalmia Cement and Granules India Ltd have also announced share buybacks.
There are two ways to buyback
There are two types of buybacks. One is the open tender offer from the current shareholders and the other the open market through the stock exchange. Most companies take the open market offer route. In the buyback done through the tender offer route, 15 percent of the shares have to be reserved to buy back from the small shareholders. Small shareholders means investors whose market value does not exceed 2 lakhs on record date.
Tips for investors
- Investors should analyze the movement of share price immediately before the announcement of buyback. If there is a sharp rise in the stock price then investors should be careful.
- Investors should also pay attention to the size, price and duration of the offer. If the buyback size is too low as compared to the total market cap of the company, one should not expect a significant change in the stock price after the buyback.
- Investors should focus on debt-equity ratio. If the debt level is higher than the industry average, it means that in the near future, the company’s free cash flow will not be better.
- Some investors prefer dividends more than buybacks as it is more tax-efficient.
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