The number of companies going for share buybacks has been on the rise lately. The trend has picked pace especially after Union Budget 2016-17, where the government imposed an additional Dividend Distribution Tax (DDT). Many companies went on to declare dividends after the announcement. And those who missed the bus are now taking the share buyback route.
In a buyback, the company purchases its own shares from the stock market. Subsequently, it cancels them or keeps them as treasury shares. The whole buyback process results in the reduction of company's outstanding shares.
A buyback could mean the company has adequate cash to buy its own shares and is willing to reward its shareholders. It could also mean an improvement in financial ratios such as price to earnings, return on assets, and return on equity.
Apart from the above, buybacks make a lot of sense for companies now as they've turned tax efficient over dividends in India.
Many companies have already taken the plunge, while some are in the process. And going by the momentum, more could follow in the coming days...
In this report, we reveal four proven strategies to picking multibagger stocks.
Well over a million copies of this report have already been claimed over the years.
Go ahead, grab your copy today. It's Free.
So what should long-term investors do?
There's no doubt that tendering a part of your shares in a buyback could be a tempting proposition, especially if the buyback price is higher than the market price.
However, it's important to understand that buybacks reduce the outstanding number of shares. Thus, the shareholders who don't tender their shares will end up with a bigger piece of the pie.
Doing nothing during a buyback may not be satisfying to many investors. Receiving cash may seem to be a better option.
But remember, if you really are a long-term investor, buybacks will increase the value of your existing shares. The reduced number of outstanding shares will boost per share earnings as well as RoE. And in the long run, these two measures matter more than anything else.
In all, we believe investors should consider buybacks on a case-by-case basis.
Buybacks can be seen as a healthy development. However, that should be only one of the data points investors should look at. Ultimately, it boils down to management integrity, the company's moat as well as the health of the company's balance sheet.
For information on how to pick stocks that have the potential to deliver big returns, download our special report now!
Read the latest Market Commentary
What else is happening in the markets today? Dig in...
PersonalFN analyses the features of ITI Mid-Cap Fund and explains the potential this fund has to offer to its investors.
In today's video, I'll discuss why thew stock market went up on Wednesday, 24 February 2021, when the NSE had to shut trading due to a technical glitch.
You my personal trading checklist and you will be well on your way to making it big as a trader.
In this video, I'll show you how to get started on the path to daily trading profits.
Timely review of your investment portfolio is the key, to enable stable returns and work towards your envisioned financial goals during various market phases.
More Views on NewsLast time the smallcap index crossed 19k a big correction followed. Here's what makes it different this time.
In this video, I'll cover your queries on intraday trading and also share my view on how to decide stop losses and target prices.
A look at what India's top equity mutual funds bought and sold in January 2021.
Do you enjoy reading Tesla and Bitcoin stories? Here's a not so famous small-cap stock to profit from the rise of EVs.
More
Equitymaster requests your view! Post a comment on "What Do Buybacks Mean for shareholders?". Click here!
Comments are moderated by Equitymaster, in accordance with the Terms of Use, and may not appear
on this article until they have been reviewed and deemed appropriate for posting.
In the meantime, you may want to share this article with your friends!