By Devanesan Evanson
A SIMPLE calculation suggests that share buybacks may boost share prices by decreasing the number of outstanding shares in the market. Thus, the fewer outstanding shares means the remaining shareholders now own a larger piece of the pie.
However, share buybacks also reduce a company’s cash position. As such, the company’s coffer shrinks in tandem with the quantum of share buybacks.
Let’s examine Top Glove Corp Bhd’s share buyback exercise which has somehow become a daily routine.
This follows a retreat of glove stock prices in recent times with the advent of COVID-19 vaccine roll-outs, while a ‘production lockdown’ at company level due to widespread COVID-19 infection among its workforce has cast concerns over Top Glove’s profit outlook.
From September till Dec 2, the world’s largest glove producer has spent RM1.28 bil on share buybacks. This equals to about 68% of the group’s net profit of RM1.87 bil for its financial year ended Aug 31, 2020.
The amount spent on share buybacks has also surpassed its cash and cash balances at the end of FY2020 which amounted to RM1.21 bil. Additionally, Top Glove has RM1.67 bil worth of investment securities.
As of Dec 2, Top Glove’s cumulative net outstanding treasury shares stood at 177.78 million, an equivalent of a 2.17% stake.
Boon or bane?
Questions therefore abound if Top Glove’s share buyback has a collateral motive to support its share price, and if it is indeed the right market strategy or would it be counter-productive in the longer term.
Obviously, Top Glove’s management believes that the stock itself is undervalued.
But if the share buybacks were to prevent its share price from dropping lower, this may be a herculean task as the daily traded volume of the stock easily amounts to tens of million shares.
There is no guarantee that after having forked out RM1 bil on share buybacks, Top Glove’s shares will not continue their downward momentum (if there is any).
As suggested by some market observers, it will probably be better if a company reports increasing profit and revenue every quarter while rewarding shareholders with better dividend payout, and thereby supporting its share price.
Top Glove may also invest the money it spent on share buyback to construct more plants to produce more gloves, to acquire state-of-the-art equipment or even to improve its production/marketing efficiency.
Likewise, if the RM1.28 bil were to be paid out as dividend, Top Glove’s shareholders would probably use the dividend received to buy more Top Glove shares as a token of support towards the company.
And if Top Glove wants to reserve its cash, it may consider a dividend reinvestment scheme that allows shareholders to elect to receive shares (at a discount to the market price) in lieu of the cash dividend.
Investors must not assume that buyback represents the most efficient use of capital. They need to look deeper into the decision-making process to assess if the management is really making the best possible capital allocation decision for growing shareholder value over the long-term.
In essence, it is only fair to judge whether a share buyback is a good thing or otherwise on a case-by-case basis.
To Top Glove’s credit, the company is not borrowing external money to facilitate the exercise.
For now, we may give the benefit of the doubt to Top Glove’s Board and management who have a reputation and stellar track record of enhancing long-term shareholder value.
The flurry of unabated glove/PPE and vaccine deals
Business opportunities always abound. Even amid a pandemic-stricken economy, there is wealth to be made if one possesses the enterprising foresight to cut the diamond.
In this regard, it is always a marvel to witness the creativity-cum-courage of penny stocks – especially those which have taken a plunge into the glove/personal protective equipment (PPE) and vaccine sphere – to spur the interest of investors.
It is common for listed companies to use media houses as a conduit to engage investors, alongside popular existing social media platforms such as WhatsApp chat, Telegram, Facebook groups or even private chatroom.
In so doing, the companies will likely engage a media/investor relations outfit to craft palatable media releases that appeal to the taste buds of the editors. At the end of the day, media endorsement will be the ‘icing on the cake’ to complement the pitch.
Some companies have even gone to the extent of inviting the investing fraternity to visit their plants to drum up interest.
But all that glitters is not gold, investors must not trust what they read/see on the surface; they must be able to read between the lines and make informed decisions. Likewise, they must refrain from blindly following the advice of so-called investment gurus.
There is a good chance that the guru could be wrong or worse still, working in cohort with other market manipulators. It is best for every investor to conduct his/her own research on the company that he/she wishes to invest in.
Areas to consider include the company’s financial strength, its performance track record and the reputation of the board and major shareholders.
Whenever there is doubt on the validity of a claim, investors should take further initiative to verify the truth and apply a huge dose of common sense. Often enough when our instinct tells us that the piece of information is too good to be true, it is likely to be so.
Minority shareholders must be mindful of not being victims of irrational exuberance – the unfounded market optimism that lacks a real foundation of fundamental valuation, but instead rests on psychological factors.
In the words of Benjamin Graham, “investment is most intelligent when it is most business-like”.
Devanesan Evanson is the CEO of the Minority Shareholders Watch Group, an independent research organisation to encourage good governance among public listed companies with the objective of raising shareholder value over time. He can be reached at [email protected].
