In Much, as it has been widely embraced in many economies as a way of delivering better shareholder value and improved returns on investment to equity owners, share buyback is a novelty in Nigeria.
Corporations flush with excess cash typically explore any of these four options: take a long view by investing in capital projects or other ways, pay cash dividends to the shareholders, buy up another company/business unit, or undertake a stock buyback.
Companies sometimes see share buyback programmes as a means of returning excess cash to shareholders beyond dividend payment.
A share buyback or repurchase occurs when a company buys its own shares directly from the open market in a bid to scale down the number of its outstanding shares available for public trading. The idea is to raise the demand for the shares as well as the price.
According to CNBC, buybacks are “one of the key building blocks for the nearly 11-year bull market run” on the Wall Street.
Companies usually explore this option to turn the corner where there is a perception that their shares are undervalued, that is they are selling below their real value.
Buying back shares enables a firm to reduce its equity base, spreading profits over fewer shares and ramping up its earnings per share, one of the key metrics used in investment decision-making.
Dangote Cement Plc, Nigeria’s most capitalised company, initiated the repurchase of 10 per cent of its 17.041 billion ordinary shares last December in order to scale up the long term shareholder value.
It will serve also as “a valuable tool for managing the capital structure and balance sheet efficiency” and a “window to return cash to shareholders,” according to the program explanatory statement.
The decision “reflects that the management believes in the valuation and prospects of the company. Other companies can follow suit, especially for some of those that have a high number of liquid shares outstanding and have been unable to command a very decent valuation,” Abiodun Keripe, head of research at Afrinvest West Africa said in a Bloomberg interview.
The first tranche saw the acquisition of 0.24 per cent of its issued and fully paid common stock even though management had purposed to buy back 0.5 per cent for a start.
That transaction cost the cement-maker more than N9.769 billion to consummate at a unit price of N243.02. As of the end of the third quarter of 2020, Dangote Cement held cash and cash equivalent of N176.653 billion ($449.9 million) on its books, providing the money it needed to splurge on buyback deals.
It is the first share repurchase to be launched in Nigeria as investors and regulators alike have long harboured fears that the process could be abused.
The shares to be bought back will be held as treasury shares and could be cancelled when the transaction is over. Shares in the company were up by 10 per cent the very day it announced repurchase plans.
“Share buyback programs can be great for shareholders because following the share repurchase, shareholders will own bigger portions of the company, and therefore bigger portions of the said company’s cash flow and earnings,” Seyi Omidiora, a financial advisor at Lagos-based Financial Derivatives Company Limited, told PREMIUM TIMES.
“Management will pursue share buybacks because they offer the greatest potential return for shareholders. If a company with the potential to use cash to pursue operational expansion chooses instead to repurchase its stock, then it could be a sign that the shares are undervalued. The signal is even stronger if company executives are buying up (additional) stock for themselves,” he adds.
Low-risk use of extra cash
Yet, some analysts have railed against share repurchase, holding the view that companies utilising their excess cash for such purposes will be diverting more money from other critical investments like innovation, building new factories, creating more jobs and increasing staff wages.
That retreat from bold investments, they believe, is aimed at gaming stock markets and artificially driving stock prices up, a move is seen as mostly favoring corporate executives, whose wealth is often linked to equity ownership in their firms.
A share repurchase may demonstrate to investors that the company lacks profitable opportunities for expansion, potentially putting off growth investors seeking revenue and profit increases.
Yet, its appeal has not waned among corporates around the world, particularly as regards its potential to offer reasonably low-risk approaches for companies to deploy extra cash.
“Reinvesting cash into R&D or a new product can be risky. If those investments fail, that hard-earned cash goes down the drain. In contrast, share repurchase programmes grant corporations an opportunity to invest in themselves when they believe their stocks are undervalued and offer a good return for shareholders,” Mr Omidiora said.
Stock buybacks announced in corporate America surpassed $1 trillion in 2018 alone, a figure reckoned by analysts to outweigh the value of a Facebook or an ExxonMobil. Apple accounted for $100 billion of that sum with heavyweights like Microsoft, Wells Fargo, Oracle and Merk in tow.
The figure approached $730 billion in 2019 and, despite the pandemic outbreak last year, Harvard Business Review research estimated that more than half of corporate profits in the United States go towards share buybacks, an affirmation of the stark faith Americans have in repurchase schemes to turn the corner for stocks that are priced low.
Impact on market
It remains unclear, however, how much buybacks could support market gains.
“It (buyback) is a largely common event when the equities market is experiencing an upswing. And as we know, the Dangote Cement share buyback programme was executed at a time when the Nigerian stock market was on a bullish run,” Mr Omidiora said of the appropriateness of companies to pursue buybacks during economic slowdowns like now.