SHARE BUYBACK BASICS

When the economy is in a downturn, share prices can fall sharply as a result of weaker than expected company earnings, among other factors. When this happens, a company may pursue a buyback program if it believes that its company shares are being undervalued by the market. With that said, stock buybacks have been increasing in frequency, which is not unusual, considering the condition of the economy.

Eppley Caribbean Property Value Fund, Kingston Properties REIT and GraceKennedy are among some of the companies on the Jamaica Stock Exchange that have used stock buybacks to support their stock prices when they feel their Company’s shares are trading below their true value, and an opportunity exists to enhance shareholders value.

What is a share buyback?
A share buyback happens when a business buys its own shares and then either cancels them or holds them in treasury for re-issue at a later date. To do a buyback, a business may purchase its shares in the open market in much the same manner as any other investor.

To illustrate, imagine that you own one share of company XXL that has a total of 10 shares outstanding. Company XXL’s market capitalization is $1,000,000, which means that each share is worth $100,000. The company’ stock price has fallen sharply after bad news. The company believes that this is just an overreaction by the stock market, so it buys back 1 share of its outstanding stock, which now leaves 9 outstanding shares. Now, that same market capitalization of $1,000,000 is spread across fewer shares (9) which increases their value to $111,111 per share, up from $100,000 each.

What happens after a share buyback?
Share buybacks reduce the number of shares available in the market. Since stock prices are in part based upon supply and demand conditions, when there is a less available supply of shares, then any increased demand is more likely to boost share prices. Therefore, a company can use a share buyback to reduce the number of its shares available, to bring about an increase in its stock value.

How does a share buyback benefit shareholders?
As the number of shares decrease after a buyback, the earnings per share (EPS) of the company will automatically increase. When the EPS goes up, assuming the Price to earnings ratio (P/E) remains constant, the price of the stock should also go up. This usually improves the value per share of companies, which may be considered favourable by prospective investors.

Additionally, after a buyback, each shareholder stands to benefit more from any company distribution such as dividend payments, or any appreciation in the value of the company shares, since each investor now owns a larger percentage of the company.

However, while share buybacks are important to a company’s financial stability, a company’s fundamentals and historical track record are more important to long-term value creation.

Importantly, a diversified portfolio of stocks, which may also include companies conducting buybacks, has been shown to reduce volatility and increase returns over the long term.

If you need advice in building a diversified stock portfolio, FHC Investments Limited can guide you in achieving your financial goals. Feel free to give us a call today.

The following are the current Government of Jamaica bond prices as at October 15, 2021:

*All rates quoted are opening indicative levels in the international capital markets and are subject to change based on market conditions.

The Jamaican dollar depreciated by $2.63 relative to the US dollar week-over-week, moving from a selling rate of $148.95 on Friday, October 8th to $151.58 on Friday, October 15th. The closing BOJ weighted average selling rates are as follows:

The following are the average Treasury bill rates:

Jamaica Stock Market

Movement of the JSE Indices

This week’s Market activity resulted from trading in 109 stocks, of which 46 advanced, 52 declined and 11 traded firm. Market volume amounted 90,646,695 units valued at over J$557,169,128.94. The following reflect the movement of the JSE indices.

FHCIL’s STOCK PICKS

This information should not be relied upon by the reader as Research or investment advice. If you need advice in building a diversified stock portfolio, FHC Investments Limited can guide you in achieving your financial goals. Feel free to give us a call today.