Posted at 8:00 a.m.
Could you explain the ins and outs of corporate stock buybacks? What are the benefits, for the company, for the remaining shareholders, for the sellers, etc. ?
Alain Girard
Many companies renew share buyback programs year after year. On January 31, for example, Couche-Tard revealed plans to repurchase up to US$4 billion in stock by the end of its next fiscal year.
The company could thus buy back nearly 10% of all its outstanding shares over the next 15 months.
Management shows confidence in generating more cash than it needs from its operations and sees an opportunity to enhance shareholder value.
Repurchasing its shares for cancellation is indeed a sign of confidence shown by the leaders who believe that the title is worth more than its current price, says financial adviser Robert Hurtubise, at Peak Securities.
Companies do this, for example, because they find that the best bargain – instead of making an acquisition – is to reinvest in their company by buying back shares.
Robert Hurtubise, Financial Advisor at Peak Securities
It may also indicate that management believes the company’s stock is undervalued.
Many Quebec companies are buying back their shares these days. Besides Couche-Tard in Quebec, we can also think of Metro, Gildan, Héroux-Devtek, Stingray and many others.
At Metro, for example, the number of shares issued and outstanding has been falling steadily for four years. At the end of 2018, Metro had 256 million shares outstanding, while the Montreal grocer has only 241 million today.
Companies are valued using financial ratios that highlight the profits generated per share. If the profit remains the same, but the denominator (the number of shares) becomes lower as a result of share buybacks, a company should have an advantage and a better valuation.
At the same time, for a company that pays a dividend, the exercise reduces the total amount of dividends to be paid. Share buybacks can also catch the eye of portfolio managers and investors, which can help drive demand for the stock.
In Toronto, investors can use the ticker symbol “TXBB” to track an index constructed to measure the performance of the 50 stocks in the Toronto Stock Exchange’s main index with the highest ratio of redemptions. shares over the past 12 months. This ratio is calculated by dividing the amount paid to repurchase shares by the market capitalization of the common shares at the beginning of the period in which the repurchases began.
Critics (or skeptics) will follow companies whose executives would like to make share buybacks in order to increase short-term value and thus favor their performance-related compensation, at the expense of longer-term investments like purchase of assets or research and development, for example.
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