Many companies on the S&P/ASX 200 (ASX: XJO), such as Woolworths Group Ltd (ASX: WOW) and CSL Limited (ASX: CSL), have completed share buy-backs in recent years.
Share buy-backs will continue into the future, so it is valuable to have an understanding of them.
What is a share buy-back in Australia?
In Australia, a share buy-back occurs when a company decides to repurchase (or buy back) its own shares from shareholders. These shares are then cancelled, reducing the number of shares on issue.
Share buy-back programs are performed by a company either “on-market” (i.e. on the ASX) or “off-market”. Read on for an example of each.
Proceeds received from those participating in an off-market buy-back will consist of capital and dividend components.
Why do companies undertake share buy-backs?
Companies buy back shares as a form of ‘capital management’. In essence, if a company has surplus capital, it can elect to return this to shareholders through a buy-back. This may be viewed by the company as creating more value for shareholders than simply paying another dividend.
As there are fewer shares on issue, buy-backs can boost metrics such as earnings per share (EPS). All things being equal, a higher EPS will lower a company’s price-earnings (P/E) ratio, which is one of the most frequently quoted valuation metrics in the financial community.
Difference between on-market and off-market buy-backs
An on-market buy-back means the company will purchase shares on the ASX via a broker.
In contrast, off-market buy-backs proceed via a tender process, where shareholders are provided with an opportunity to offer a percentage of their shares for sale to the company. Shareholders will receive correspondence advising on a specific price or a range of prices at which the company will consider purchasing their shares.
Do buy-back programs require shareholder approval?
For both on-market and off-market buy-backs, the company will not require shareholder approval if it will be purchasing less than 10% of the lowest number of shares on issue in the prior 12 months.
If a company would like to purchase more than this amount, shareholders will have the opportunity to vote on the matter.
Do shareholders have to participate in a share buy-back?
Participation in a share buy-back is entirely voluntary. If you do not want to participate, you can simply disregard the company’s buy-back announcement and carry on.
However, if you sell shares in a company completing an on-market buy-back, you may in fact be selling your shares back to the company and thus, ‘participating’.
How do I participate in a share buy-back?
Shareholders will only be invited to participate in an off-market share buy-back.
If a company you own shares in launches a buy-back program, you will usually receive a personalised acceptance form and additional information to help you consider participating in the buy-back. You will be advised by the company to seek professional financial/taxation advice before accepting the offer. This is, of course, completely sensible!
If you wish to participate, you will need to complete the form and nominate how many shares you would like to sell (up to a maximum number advised) and the price you will accept to sell your shares. The company will typically provide a specific price or a price range.
Finally, mail the form back to the share registry via the reply-paid envelope enclosed.
Share buy-backs on the ASX
CSL and Woolworths are two major ASX companies that have utilised share buy-back programs in recent years.
CSL: On-market buy-back
On 12 October 2016, CSL announced it would complete an on-market buyback of up to $500 million worth of its own shares.
CSL stated it would complete the on-market buy-back between 27 October 2016 and 25 October 2017, so effectively over the course of one year.
On 5 September 2017, CSL announced it had completed the buy-back, and the lowest/highest price it had paid for shares was $91.65/$140 respectively.
Woolworths: Off-market buy-back
On 1 April 2019, Woolworths announced it would embark upon a $1.7 billion off-market buy-back. Shareholders in Woolworths could offer to sell some or all of their shares back to the company at a 10-14% discount price to the market price.
On 27 May 2019, Woolworths announced the completion of the buyback at a price of $28.94 per share – representing a 14% discount to the market price of Woolworths shares at the time.
You might be wondering why shareholders were keen to offload Woolworths shares at a price less than the market price. This is because the buy-back included a significant portion of franking credits, which can offer tax advantages.
Woolworths was able to offer a price below the market price as the buy-back included a significant portion of franking credits, which could be particularly valuable to those on lower tax rates.
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