The recent spate of stock buybacks

When stock can be bought below a business's value it is probably the best use of cash.

Warren Buffet

The Indian capital markets have seen a spate of stock buyback announcements in recent months, and that too from businesses of all sizes and industries. Here is a summary of some of the recent buyback announcements:

Company	Announcement date	Buyback price	CMP	Premium%	Buyback size (Rs cr)
Infosys	11-Jan-19	800	727.9	9.9	8260
IOC	13-Dec-18	149	137.35	8.5	4435
ONGC	21-Dec-18	159	141.05	12.7	4022
NHPC	14-Nov-18	28	24.45	14.5	2615.6
Bosch	10-Dec-18	21000	18171.95	15.6	2159
Oil India	19-Nov-18	215	170.3	26.2	1085.7
Mphasis	27-Nov-18	1350	972.8	38.8	988.3
HEG	26-Nov-18	5500	1980.3	177.7	750
Tata Investment Corp	16-Nov-18	1000	822.1	21.6	450
SKF India	4-Dec-18	2100	1920.05	9.4	399
Natco Pharma	5-Nov-18	1000	665.95	50.2	250
Persistent Systems	28-Jan-19	750	583.4	28.6	225
Triveni Turbine	1-Nov-18	150	106.35	41.0	150
Indian Energy Exchange	20-Dec-18	185	158.35	16.8	69

In a buyback, a firm purchases its shares from existing shareholders, usually at a price higher than the prevailing market price. Buybacks are a more efficient way of returning money to shareholders compared to issuing dividends, since the firm avoids the burden of dividend distribution tax (DDT). A buyback announcement is a strong statement of belief by the firm’s management that the market is undervaluing the shares of the company. The management backs up this belief by using the firm’s money to buy back shares from the existing shareholders at a predetermined price (which it considers as the fair value), thus reducing the number of outstanding shares available. This boosts the earnings per share and consequently the price of the share as well.

Of late we are witnessing a phenomenon where an increasing number of companies are choosing to announce buybacks. This indicates general fatigue in the market for correctly valuing shares of the firm. Moreover, the above table shows that the price of the share continues to lag behind the buyback price by a significant amount despite the buyback announcement. Although the data presented here is from the last quarter of 2018, this trend has been witnessed throughout 2018 and is nothing sort of an anomaly. The management of the firm has the best view of the business and competitive landscape and if they think that buying back their own shares is the best use of cash then that belief deserves nothing but support.

What to Do

A buyback announcement presents investors with an opportunity to exit their investments at the buyback price in a depressed market, of the kind that we are witnessing now. Hence in such times investors should always subscribe to the buyback to the fullest extent possible. The buyback ratio is calculated differently for different categories of investors and it determines the percentage of shares in an investors holding that qualify for the buyback. After subscribing to the buyback to the maximum extent possible, investors should hold on to the balance shares until the market price reaches the buyback price, which is an event destined to happen sooner than later.