Buyback - buyback of own shares. Does this bode well for the company?

At the beginning of our adventure with the stock exchange, it will quickly turn out that in addition to knowing the basic issues regarding the assessment of the company's attractiveness in terms of purchasing its securities, there will be a lot of other ambiguities. They result from current decisions in the course of ordinary business activities - including announcements, reports, reports or information about new loans that the company will make available during its operation. They will affect the company's course to a varying degree. They may concern, for example, monthly sales reports, change of a board member, or, as in today's article, buyback of own shares.

It is therefore worth knowing what potential premises guide the enterprise when it buys its securities.

Attractive valuation

Buyback, or buyback of own shares, is a very common phenomenon at the end of a bear market. Why? The answer is very simple. After a period of market downturn, securities companies tend to be extremely cheap (below their book value), so this is a very good time to buy them at an attractive price.

This is where the key question arises and at the same time the following question arises - how to tell if a company is buying undervalued stocks? The simplest index illustrating the valuation is C / WK. It has many disadvantages, although it provides us with the fastest and most vivid information about a potential undervaluation of the company. In book terms (strongly theoretically), it should be lower than 1. For example, if P / W is 0,83, we say that for PLN 1 of the company's assets, we have to pay PLN 0,83. Consequently, the company is undervalued.

Redemption of securities

The vast majority of companies that buy back their own shares (approx. 90% of cases) carry out these activities in order to redeem securities later. The redemption of the purchased shares influences (positively), among other things indicators such as ROE (profitability), but also those dependent on the price of paper. This is primarily about C / Z. The price to profit (P / E) ratio improves the perception of the company by analysts who are more likely to raise their forecasts for the company. Therefore, this type of buyback can be considered a "small fraud" that improves the overall financial rating of the company through ratio analysis.

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In theory, it should not negatively affect our securities portfolio. On the contrary, it gives investors the opportunity to sell shares at a favorable price. However, for those who do not decide to participate in the purchase, the percentage share in the company's shareholding is automatically increased. This is due to the simple fact that fewer securities of a given company will be available in the market after the buyback.

Buyback instead of dividends

Some companies treat share buyback as an alternative to dividends. This is an interesting solution, however, it does not always generate benefits that would be offered to a shareholder by a dividend instead. By looking at these 'maneuvers' by companies, they decide to buyback instead of paying out a portion of the profit, usually when the price has dropped drastically. This is to repair it by reducing the stocks in circulation. Therefore, the profit goes to shareholders directly through the price of a given asset. This model is very popular in the US, we use it more often during the weak the economic situation on the market.

What happens to focused stocks?

In addition to the redemption, there are several options for what a company with concentrated shares can do. However, they are found in a decided minority. Some companies advertise a buyback because they are used as collateral, such as a loan. The company's management can also purchase them for resale or give them to employees in the form of an additional bonus to the salary / purchase offer.

In the event of redemption, further treatment of the redeemed shares seems clear. The problem may arise when assessing, for example, the resale of securities purchased through buyback, for example to the company's employees. It is difficult for us to say unequivocally what impact this will have on the company's course or policy. As minority investors, we usually do not have very detailed knowledge about the condition of the company and its market environment to determine what the consequences of this move will be and, what is more, whether it will be profitable.

How many treasury shares can the company buy?

The Commercial Companies Code clearly regulates the legal rules for buying back own shares. They concern two basic things. I am talking about the price limit and the transaction volume. The law regulates it as follows

• price limit - according to the regulation (Article 3 (2)), issuers may not purchase shares at a price higher than the price of the last independent transaction or - if higher - the highest current independent purchase offer on the trading venue. This means that price limit in the order cannot be higher than the price of the last transaction or the best purchase offer.
• volume limit - it basically determines the maximum number of shares that the company can purchase per day. This value is precisely determined by the regulation (Article 3 (3)), which specifies a few limitations. As part of the buy-back of own shares, the company may not purchase more than 25% of the average daily trading volume on own securities during the session.

How is the average daily turnover calculated? It is based on two assumptions:

1. 20 trading days prior to the order
2. 20 trading days preceding the month of disclosure of information on the purchase program

In either of these two ways, the average is computed.

Buyback in a special market situation?

Often, when asked whether something has a negative or a positive effect on the market, economists answer "differently" or "it depends". Here, too, there is no clear answer that this is only a positive / negative phenomenon. In most cases, buyback is assessed in two ways, although one should take a closer look at the reasons given by the company in the justification of the purchase and the market situation in which it is located.