To buy back or not to buy back? That is the question. But what is the message?

Share buybacks are back! Buybacks have traditionally been more frequent in the US stock market rather than in UK or Europe, but lately they have become a global phenomenon.?

To put this into context, the world’s 1,200 largest public companies collectively bought back a groundbreaking $1.3tn of their own shares last year, triple the frequency of a decade ago, and almost as much as they paid to shareholders in dividends (according to research by Janus Henderson).?

In very recent days the London Stock Exchange Group, HSBC, NatWest, BP and Shell, amongst many others, have all announced share buyback programmes here in the UK.?

But have companies got the messaging right before announcing the buyback??

Communicating the right message is so important. Ultimately, companies need to strike a balance between promoting benefits of the buyback with managing any potential risks or criticisms associated with its decision.?

Always sense check the strategic and financial logic of doing a buyback and then explain it succinctly.?

We all know the technical benefits of buybacks:?

• Logically, buybacks make availability of shares scarcer, so announcing a share buyback often boosts the price of shares and provides a constant and willing buyer of stock in the market.?
• Reduces cost of capital. Deploying surplus cash can improve overall performance when that excess cash is utilised, through enhanced return on equity (ROE) and other means.?
• Share buyback increases earnings per share (EPS). EPS rises when there are fewer shares trading on the market given that the shares that are bought back by the company are cancelled.?
• Tax efficiency. Share buybacks can be more tax-efficient for shareholders compared to dividends, as shareholders have more control over capital gains (this has attracted the scrutiny of regulators recently).?

Caution: has the company run out of ideas for investment of their cash before spending it on buying back shares??

Though share buybacks are considered to be financially and technically efficient, it is important to note other key implications. Share buybacks can benefit investors in the short-term (by increasing share price and EPS), sometimes these programmes can be at the expense of long-term investments and development. If a company allocates too much of its cash to buybacks, it may miss out on other potential growth opportunities (e.g. acquisitions, hiring talent, investment, research, development etc).?

Simple advice – don’t forget to get your messaging right!?

Companies should not just assume a share buyback is a good thing. Some investors, market commentators and financial media can be sceptical and give them a bad rap. Think about your message – are we spending the company’s cash the right way? Take time to explain the strategic motivation behind the buyback and don’t assume widespread understanding as a given.?

#Investment #CorporateFinance #Sharebuyback #stockmarket ?