Rewarding shareholders is a strategic objective of listed companies, which can be achieved through dividend payouts or a share buyback plan. Dividend payouts create a pattern and an expectation among investors, and hence, there is a need to strive to maintain the dividend schedules so that confidence in the company's financial strength remains intact.
Conversely, share buybacks are typically employed as a one-off or occasional strategy by companies to distribute surplus cash from their balance sheets when they do not have more compelling uses for the funds.
While this is the most common reason, in certain instances, share buybacks are used to increase promoter holding, safeguard against hostile takeovers, support the share price, and increase earnings per share.
While share buybacks are generally strategically planned and are not frequent, this does not imply that companies cannot resort to share buybacks frequently to reward shareholders. Some companies, especially those with robust cash generation capability, more often seen in the information technology sector, where the need for constant capital investment is less common, strategically use share buybacks more frequently to reward shareholders, as in the case of Infosys.
Over the last few years, they have undergone multiple rounds of share buybacks. Buybacks have found favour in the last couple of years, and companies across the board are carrying out this strategic capital allocation exercise
WHAT DOES A SHARE BUYBACK MEAN?
A share buyback is a strategic capital allocation initiative undertaken by a public company that involves repurchasing its shares in the secondary market from existing shareholders to reduce the number of outstanding shares in the open market. Once the repurchase is completed, the shares are extinguished, reducing the total number of shares outstanding.
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هذه القصة مأخوذة من طبعة September, 2023 من Beyond Market.
ابدأ النسخة التجريبية المجانية من Magzter GOLD لمدة 7 أيام للوصول إلى آلاف القصص المتميزة المنسقة وأكثر من 9,000 مجلة وصحيفة.
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