Stock repurchase market price affect on stocks

Stock repurchase market price affect on stocks

Posted: SergeyG Date: 28.06.2017

The year started with shopping news of a different kind-share buybacks. First, the market regulator, the Securities and Exchange Board of India Sebi , changed the process and mandated that companies buying back own shares should declare the buyback ratio, as they do in rights issues, and fix a record date.

Buyback ratio is a market valuation measure used to gauge what percentage of market value is being reduced by the share buyback activity.

The value of share buybacks | McKinsey & Company

Four per cent is the return given by the RIL stock between the announcement and start of buyback Second, Sebi approved changes in rules to allow public sector units PSUs to buy back shares. As a result, shares of PSUs such as MMTC, Hindustan Copper, State Trading Corporation of India and Dredging Corporation of India rose per cent in the first five trading sessions of January. However, on January 6, the Union cabinet deferred the decision due to differences among ministries.

Third, on January 20, Reliance Industries, or RIL, approved buyback of up to million shares at a price not exceeding Rs per share. The stock has risen 4 per cent since despite the company reporting poor numbers for the third quarter.

It was at Rs at the commencement of the buyback on February 1. Why did shares of RIL and PSUs rise on buyback news?

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Varun Goel, head, equity portfolio management services, Karvy Private Wealth, says, "A buyback is done to send a signal to the market that the company believes the stock is trading below its intrinsic value. Behind RIL's share buyback move "Shares react positively to such announcements because buyback reduces the number of shares outstanding, which increases investors' claims on dividends and earnings of the company.

As these claims increase, so do stock prices," says Samir Gilani, head, derivatives, and co-head, equities, MAPE Securities. However, Goel says, "A buyback may create a short-term spike that may not last. Most of the times, it is perceived as a vote of confidence in the company. However, in some cases, a company may buy back shares to delist. Share buyback means purchase of outstanding shares by a company to reduce the number of shares trading in the market.

Market experts say it usually shows the confidence of promoters in the future of the company. Pavan Kumar Vijay, managing director, Corporate Professionals Group, says, "There are a number of reasons companies go for buybacks. The intention is to reward investors, improve financial ratios such as price to earnings, return on assets and return on equity , increase promoter holding, reduce public float and check the falling stock price, reduce volatility and build investor confidence.

Does a Stock Buyback Affect the Share Price? -- The Motley Fool

In tender offer, the company makes an offer to buy a certain number of shares at a specific price directly from shareholders. Brijesh Parnami, chief executive officer, distribution, Destimoney Enterprises, says, "This route ensures all shareholders are treated equally, however small they are. It fixes a price cap and can buy for any price up to that.

The biggest difference between the two is that the price in the tender route is fixed," says Parnami. WHAT'S IN IT FOR INVESTORS?

stock repurchase market price affect on stocks

A buyback usually improves the confidence of investors in the company and so its stock price rises. However, past data reveal the stock can move in either direction after the buyback announcement, though it helps stocks in most cases See Stock Moves.

For instance, out of companies in the BSE index, 14 bought back shares in Of these, share prices of eight rose between the announcement date and the day the buyback started. Onmobile Global, for instance, rose as much as Four per cent is the return given by the RIL stock between the announcement and start of buyback On the downside, share prices of Deccan Chronicle Holdings DCHL , Jindal Poly Films, Amtek Auto and Praj Indusries, Balrampur Chini and FDC fell However, Vijay says, "The price trend depends on various factors such as the market situation, the mode of the offer, that is, tender or market purchase, the size of the offer, the difference between the offer price and the market price of the stock and the market's confidence in the management's intention to carry out the offer.

From the date of announcement till the start of buyback on July 1, its stock rose 3. CRISIL made a similar announcement on 18 October Between then and 26 December , the day the buyback started, the stock rose 1.

However, Indiabulls Real Estate started moving southwards after the buyback announcement. The company announced a buyback on 15 December , after which the stock tumbled 3 per cent to Rs The benchmark BSE Realty index fell 6 per cent from 1, to 1, during the period.

The shares of a company entering into a buyback can move in either directions after the announcement Click here to Enlarge "The movement of a stock after the buyback announcement depends on valuations. The result can differ from company to company," says Gajendra Nagpal, founder and chief executive, Unicon Investment Solutions. If you plan to invest in companies which are going to buy back their shares, market experts have a word of caution for you.

Despite the commencement of buyback, market experts have mixed views on RIL. For instance, Goldman Sachs upgraded its target price from Rs to Rs on 7 February However, according to a research report of Mansukh Securities and Finance issued on 4 February , the stock can touch a level of Rs in the next 12 months.

stock repurchase market price affect on stocks

On February 6, , RIL was trading at Rs Investors must study the company they wish to invest in and take a decision based on its ability to generate profits. In some rare cases, buybacks are announced to trigger certain favourable movements anticipation of an upward movement in stock price ," says Gilani of Mape Securities.

Goel of Karvy Private Wealth says, "It is important to look at the size of the buyback offer, the buyback price and the duration of the offer. This is because if the buyback size is too small compared with the overall market capitalisation of the company, the impact on the stock could be very small. Four per cent is the return given by the RIL stock between the announcement and start of buyback.

Be cautious when investing in company going for share buyback

The shares of a company entering into a buyback can move in either directions after the announcement. Click here to Enlarge. Previous Story Right time to invest in long-term debt funds.

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stock repurchase market price affect on stocks

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