Buybacks- An Arbitrage or A Gamble?

I believe, A SAFE BET. Here's why-

"Don't look to jump over 7-foot bars, look to jump over 1-foot bars everytime."

Disclaimer- This newsletter has been created only for Indian Stocks. Information available in this newletter, is verified and declared by the companies here by referred to. Information provided here, is only for creating awareness and does not resort to suggesting any form of action. Any decision to do so, is solely based on one's understanding of the market and his/her intent and not the responsibility of the writer.

Introduction on Buybacks!

Buyback is also termed as a share purchase. When a firm purchases its own outstanding shares to bring down the number of shares which are available in the open market. Firms buy back shares for several reasons including to raise the value of remaining shares which are available by bringing down the supply or blocking other shareholders from taking over the control.

With a buyback, firms will be permitted to invest in themselves. When the number of outstanding shares in the market is reduced, the proportion of shares that are owned by investors increases. A firm might feel that its shares are being undervalued and perform a buyback with an aim to provide investors with a return.

The share repurchase brings down the number of existing shares which makes each share worth a greater percentage of the corporation. The stock's Earning Per Share (EPS) thus raises while the Price-to-Earnings ratio (P/E) goes down or the stock price elevates. A buyback indicates to investors that the firm has enough cash kept aside for emergencies, and there are fewer chances of economic troubles.

Understanding Buybacks-

Firms could opt for a buyback even for compensation-related reasons. Often, firms award their management and employees with stock options and stock rewards. To make due to options and rewards, firms buy back shares and give them to management and employees. This helps in avoiding the dilution of the existing shareholders.

Since share buybacks are executed by utilising a company's retained earnings, the net economic impact to investors will be the same as if those preserved earnings were given out as shareholder dividends.

A Possible Arbitrage?

According to my experience, the markets will always adjust themselves for the stipulated prices declared by the companies during the buy back tenure or the prices at which the company plans on issuing more shares.

A few recent examples-

Yes Bank- Price dropped after company declared issuance of more shares at 12 rupees. (P.C- Tradingview)

Wipro- Increase in stock price after firm issued a buyback at 400 INR. (P.C- Tradingview)

Accordingly, taking this into account, buying shares after buybacks have been declared and waiting for them to move in that stipulated direction does seem like a safe bet.

Buybacks which can help you earn-

Current Arbitrages Available.

TCS and Wipro both announced their buybacks back in November 2020. During that time, the prices were close to 2650 INR and 290 INR. The buybacks for both companies have been issued at 3000 INR and 400 INR repectively and their current market prices are close to 2900 INR and 385 INR respectively. That stills accounts for a 3% gain in the next month or so. If you are not in the game yet, you still have some window left.

Upcoming Buybacks-

HPCL - The company has already declared a buyback at 250 Rupees per share. The current price of the stock is around 220 INR. So, there is a potential upside of 13.5%.

Until then,