23 June 2013

Shares Buy Back vs Dividend Payout

Yesterday I met with friends and they asked me about the impact of shares buy back. My answer to them was that I prefer shares buy back against divided payout.

Let's look at the example of shares buy back. If the company A total outstanding shares is 10,000,000 shares and the company decided to buy back 10% or 1,000,000 shares, the outstanding shares will be reduced by 10% to 9,000,000 and the EPS in short will be increased by 11%. If the overall situation do not change, you would need the shares price to go up by 11% to back the previous PE level. 

Of course you would say this is just a theory, and the current market situation might not react like what theory would predict. Some investors would think that the company have wasted the money in doing something not creating the "real" fortune to the shareholders. They would prefer the company to spend the money on something that is good for future investment. For example, YTL Power has loaded money, but if they keep on buy back the shares and do not have any good investment in future, then this will not attract investors who are looking for future growth. 

However, if you distribute the excess cash back to shareholders, it only give benefits to those who like steady cash flow income and do not really fancy of capital appreciation game. Anyway as we do not pay for capital gain in Singapore and Malaysia, it is wise for us to re-invest the dividend back to the counters and enjoy the future ride of the share price later. 

Above are just my thought on shares buy back and dividend payout. I welcome your feedback in this topic.

1 comment:

  1. Share buy-back may mean that the Mgmt has room to slack for years ahead :-)


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