19-03-2016, 10:00 AM
(18-03-2016, 09:56 PM)BlueKelah Wrote:(18-03-2016, 12:39 PM)propertyinvestor Wrote: You may want to rethink this gesture in this case. PEC written down book value is 80c. Buying back shares at 41c immediately adds a value of 39c to the company, improves EPS and ROE. Whats wrong about that? Currently, the cash per share already exceeds the market cap of the company. Management should be more aggressive with share buybacksthere is an example here demonstrating the math behind how share buyback decreases book value and increases EPS and ROE in the link below.
http://www.investopedia.com/articles/fun...-value.asp
To put it simply, PEC book value may be 80c, around 40cents+ is in cash. Lets say company spends 40cents worth cash on buybacks. book value will be down to 40cents as the cash gone into the buybacks is gone.
So now you have increased ROE/ROA/EPS due to less shares but book value is down to 40cents due to the cash asset gone. Improvement in financial ratios and possibly share price comes at the expense of book value.
See how the share buy back does not add any value? It's just a play on numbers.
There is nothing wrong with doing share buybacks, it is perfectly legal and common practice of many companies and it does make things look better on paper and usually provides a boost to share price in the short term. For short term holders its a great thing!! but for long term investors it will not create that much value.
However . Some pertinent questions we have to be aware is
1) Can company value add by investing the cash to grow the company, eg. acquisitions/marketing/improving productivity?
2) What will happen to all those treasury shares after buyback? are they gonna give out as ESOS and dilute your share?
3) Is this a reasonably low price that the buyback is occuring or is it just to shore up and protect the share price from sliding?
4) Is this done at the expense of maintaining a steady dividend?
When the company buys back the shares at 50% discount to book value, they are getting 2c of value for every 1c spent. This is beneficial for the other shareholders. That's why it's good for the company to do so only if they are generating free cashflow.