Big news today for investors was the announcement on share buybacks. Previously companies could only buy them back if the price went below par (or book*) value. So what does that mean and why is it good news? ( DubaiShareTalk topic )
UAE lifts some curbs on share buybacks
Reuters 16 May 2006 Dubai:
The UAE Cabinet has removed some curbs on share buybacks, hoping to encourage companies to add some support to tumbling stock markets.
The official WAM news agency said yesterday the new rules would allow companies to purchase up to 10 per cent of their own stock, but gave few details.
Par value is usually the original price shares are sold for when a company allows the public to buy them (called an IPO - Initial Public Offering). For example, DANA Gas last year went public and their shares were 1 dh each. You could fill in forms at one of several banks, give them money to give to the company, and after a few weeks get shares in your name for 1 dh each. Then wait a bit longer until DANA shares start trading on the stockmarket (ADSM - Abu Dhabi Securities Market as it happens) and you can sell them again (hopefully for a higher price). Or buy more shares from other shareholders if you prefer to increase your holding.
Currently DANA Gas shares are a little over 2 dhs each. They were almost 6 dhs a few months ago. Note that when you buy and sell shares, you're buying from other people or selling to other people. The company is no longer involved in the trading - they already got their money from the IPO.
Usually in the long term, if a company is making money, share prices go up. But sometimes, share prices go down to a level that the company thinks is below what they should be worth. The company may then consider buying the shares on the market especially if the company has a lot of cash not being used. Then, they cancel the shares (or should do). That means that the remaining shareholders - you and I - now own a bigger part of the company than previously even though we still have the same number of shares. For example...
SHUSMA PJSC (not a real company) has issued 100 shares at 1 dh each. You own 25 of them which means you own 25% of the company. SHUSMA has 500 dhs in the bank and the shares are trading at 5 dhs each which SHUSMA thinks is very low. So they decide to buy back 50 shares with half of their money in the bank and cancel them. That means there are only 50 shares outstanding. You still own 25 of them at 5 dhs each but 25 out of 50 shares is now 50% of the company that you own.
Obviously the reality is not quite as dramatic but that's the idea. Note that often a share price will go up a bit if a company does a buyback - for example FGB (First Gulf Bank) shares last week when they annouced they'd buyback 10%.
But back to the significance of the law on buybacks. Some companies shares trading on ADSM and DFM are thought to be good value at present market prices and many of these companies have cash in the bank. So they'd like to buy their own shares back but were prevented because the law said they could only do that if the share price went below par value. This will change after today's announcement (not that the market reacted particularly well - yesterday DFM was down 7%, today was a bit mixed but DFM closed up very slightly at 0.4%).
FGB is a good example here. Currently their price is about 14-15 dhs but par value is 1 dh. Highly unlikely they would ever get to par value. Now with the law change, FGB can buy their own shares and the net result is an increase in shareholder value. We hope.
You may have heard of MSFT - Microsoft? They have been spending $$$ on share buybacks (I think several $billion in the past year).
*Originally I thought I read Par Value which is what I've based the above explanation on. The Reuters report today refers to Book Value. The difference being that total Par Value should reflect the value of the company when it is publicly listed for the first time (not always the case) and Book Value is what each company's share is worth now according to the accountants (which is usually much lower than the actual market price of a share). Eg today: FGB share price is 14 dhs, Par Value is 1 dh, and Book Value is about 7 dhs.
The explanation I gave above is roughly ok but I'll modify it if/when I confirm that the Reuters version is correct.
