Share Buy-Back By REITs : Does It Make Sense ?
I fully understand the benefit of “share buy-back “ as it has been carried out by many companies who see the value of their share when the price might be temporary plummeted due to market condition or caused by certain bad news.
What is a Share Repurchase/ Buy-Back ( From Investopedia.com)
A share repurchase is a program by which a company buys back its own shares from the marketplace, usually because management thinks the shares are undervalued, and thereby reducing the number of outstanding shares. The company buys shares directly from the market or offers its shareholders the option of tendering their shares directly to the company at a fixed price.
BREAKING DOWN Share Repurchase
Because a share repurchase reduces the number of shares outstanding, it increases earnings per share and elevates the market value of the remaining shares. After repurchase, the shares are cancelled or held as treasury shares, so they are no longer held publicly and are not outstanding.
Reasons for a Share Repurchase
A share repurchase reduces the total assets of the business so that its return on assets, return on equity and other metrics improve when compared to not repurchasing shares. Reducing the number of shares means earnings per share (EPS), revenue and cash flow grow more quickly. If the business pays out the same amount of total money to shareholders annually in dividends and the total number of shares decreases, each shareholder receives a larger annual dividend. If the corporation grows its earnings and its total dividend payout, decreasing the total number of shares further increases the dividend growth. Shareholders expect a corporation paying regular dividends will continue doing so.
Share repurchases fill the gap between excess capital and dividends so that the business returns more to shareholders without locking into a pattern. For example, assume the corporation wants to return 75% of its earnings to shareholders and keep its dividend payout ratio at 50%. The company returns the other 25% in the form of share repurchases to complement the dividend.
Benefits of a Share Repurchase
A share repurchase shows the corporation believes its shares are undervalued and is an efficient method of putting money back in shareholders’ pockets. The share repurchase reduces the number of existing shares, making each worth a greater percentage of the corporation. The stock’s EPS increases while the price-earnings ratio (P/E) decreases or the stock price increases. A share repurchase demonstrates to investors that the business has sufficient cash set aside for emergencies and a low probability of economic troubles.
Legendary Warren Buffett has been actively buying back his own share (BERK) when the PB of his company hit a certain level which he deems the company is “undervalue” at that price level.
“Berkshire signalled it was prepared to buy back its own stock in July 2018, when it loosened the rules Buffett and his longtime lieutenant Charlie Munger use to decide whether to purchase the stock. With a cash pile of more than $100 billion and few opportunities to buy companies at a price Buffett is willing to pay, buying back the company's own stock was seen as a good option.”
Every quarter, hundreds of billions spent by SP500 companies to perform the share buyback and this has been known as one of the reasons that fuel the current bull market.
But for REIT, does it make sense to perform share buyback since it needs to distribute 90% of their income and doesn’t have cash sitting or idling like some of the companies who have very strong FCF or cash pile. There is no tax benefit for REITs in doing this, other than “signalling effect” or maintain the price level.
I have much reservation for the practice of share buyback by REIT and would rather the cash being distributed back to unitholders and let them decide if they share is really undervalue, they can choose what they wanted to do with the cash.
In the long run, buying properties should still be the underlying fundamentals for REITs to grow their portfolio. Buying back shares is just an opportunistic. Does K-REIT's manager seeing the opportunities which we don’t? What do you think?
Quote Of The Day:
"When stock can be bought below a business's value it is probably the best use of cash." By Warren Buffett
Another problem face by K-REIT is the high management fees as compared to others. No doubt, K-REIT has very good and high-quality assets but the fees structure make it one of the worst yield REIT listed on SGX. ( around 4+%)
1 Change That Needs To Be Made To How Singapore REITs Are Managed
I have divested my last batch of K-REIT in 2017 and never look back since then… thanks for right timing in buying right after GFC, it gave me an XIRR of 29.2% in holding it for 10 years.
Thank You K-REIT !!
Who are those saying market timing by either luck or skill is not important for gigantic gains on individual stock pick?ReplyDelete
Hi Uncle CW8888,Delete
Yup, luck really play an important role in one's overall ROI , buying during crisis will make things much difference...but then again , who dare to buy during crisis ? psychology factors come into play.... :D
On the whole I disagree with share repurchases. In particular the wave of borrowing money to buy back shares. This smells of accounting shennanigans.ReplyDelete
If there is excess cash in the company then it means that the management of that company cannot find a decent investment in building up the company. One has to ask why.
We also have to distinguish between US companies and SG companies. Dividends paid in the US are taxed at the marginal rate of income tax, at least 15% but can be 22% or more. Dividends paid to foreign shareholders are subject to withholding tax at 30%.
Buffet has never paid any dividends and always provided returns to shareholders through the increasing value of the portfolio. In this case he has chosen the most tax efficient way of doing it.
Dividends are not taxed in Singapore, so this argument does not apply.
I agree with your conclusion, that excess cash should be returned to shareholders, however, in the case of Keppel, surely the excess cash should be used to reduce the gearing? REITS are very leveraged entities, and reducing that leverage would reduce interest expenses and through that provide a much more efficient path to increasing the returns to unitholders by increasing the DPU.
Thanks for the comments. Yes! You are absolutely right that there is no tax benefits for share buyback in Singapore context Vs US companies. I guess for K-Reit their arguments us the share buyback is still yield accretive since the cost of borrowing us still lower than DPU , guess this is why they are also not using the cash to settle their debts.
But again, many more companies would have better reason or justification than K-Reit to do the buyback as their PB is much lower and yield is much higher..even some developers stocks.
Your K profit is insane. This is how people get Rich !ReplyDelete
Hi Cory, Luck play a very important role here.. thanks for the comments btw.. hahaha..:DDelete
I don’t waste my free time that’s why I read the informative things when I got this blog I really enjoyed reading this.ReplyDelete
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I think share buyback makes sense if it is trading below book value. This helps close the valuation gap between market and book value where the latter is measured as a sum of the parts basis.ReplyDelete
Thanks for sharing this nice article. It really help me.ReplyDelete
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