Today, we are going to talk about the Buyback of Shares. What if the Company has excess cash?
It can do three things with the excess cash:
- Dividend Payout
- Shares Buy-back
- Capex (Capital Expenditure)
The company can payout dividends to its shareholder with its excess cash or can do CAPEX in the company. But what if there is no place for CAPEX and the dividend is already paid out, then the option available for the company is buyback of share.
The buyback is a much better way to use excess cash than a dividend because dividends are taxed in the hands of shareholders
Sometimes, by Buying-back shares, management conveys that their company’s share price is lower than its fair value.
But how can we earn from buy-backs?
Most of the times, Companies offer a price in buy-back higher than CMP (Current Market Price)
Hence, when companies give a good premium on price, the acceptance ratio come into the picture.
Acceptance ratio is the probability of how much of shares will get accepted by the company in buy-back;
This ratio becomes so important as if lower shares will get accepted, lower the profit, and higher the risk of selling remaining shares at a profit
Hence, the premium of CMP and Acceptance ratio becomes the most important Metric in buy-back strategy
Here we have taken 4 recent buy-backs and explained how it can be beneficial for us and how we can make strategies to earn from the buy-backs
Companies can buy-back their shares in two ways
- Through Open market route (companies go and buy shares from open market)
- Through Tender route (Where company’s shareholders can apply for buy-back on the price given by the company)
We can apply our buy-back strategy only when there is a buy-back through the Tender route