Listed paints manufacturer Crown Paints #ticker:BERG plans to use part of the Sh906 million retained earnings to buy back 15 per cent of its issued shares from the market, the group chief executive said on Friday.
The first buy-back at the bourse may cost the firm over Sh600 million but potentially raise future dividends by reducing the market float.
The company said it will be seeking shareholder approval to buy 10.7 million shares, which would leave it with just 60.5 million units issued on the Nairobi Securities Exchange (NSE).
Crown will pay the equivalent of the mean closing price of the stock at the NSE for the one-year period preceding the date its board chooses to exercise the option to buy.
“This is just a form of restructuring and capital re-distribution, it is not affecting the company’s operations in any way. The money to buy back the shares is coming from reserves and as a result of this (buy-back) we expect to see improved earnings per share in future,” Crown Paints Group Chief Executive Rakesh Rao told the Business Daily.
Shareholders will be asked to approve the buy-back during the firm’s annual general meeting tomorrow. If approved, Crown will have an 18-month window within which to exercise the option.
The Companies Act 2015 allows a firm to buy-back its shares from shareholders, provided that such shares are purchased from the firm’s distributable profits or the proceeds of a fresh issue of shares made for the purpose of financing the deal.
A share buy-back option, in reducing the number of issued shares, would potentially make the stock more illiquid in the market.
Should there be sustained demand on the stock after the option is exercised, its price would go up thus helping the existing shareholders book capital gains.
Due to the smaller number of shares in issue, Crown would be able to reduce cash outflow without reducing the dividend per share, even if the company were to keep the total dividend payout flat.
Buy-backs are popular in Western markets.