Companies Act passage opens door for firms to buy back issued shares

The passage of the Companies Act 2015 allows firms to buy back their issued shares, opening a door for companies such as Safaricom which had indicated a desire to take the option.

Introduction of share buybacks is expected to benefit public companies whose shares are undervalued, with such purchases enhancing value for continuing shareholders.

Some of the firms that could benefit from the new law include Unga Group, Kenya Re, Kenya Power, Total Kenya, and HF Group that are all trading below their net assets.

The repurchases reduce the volume of outstanding shares as some investors sell their holdings to the company, with those remaining having a greater claim on the firm’s assets and future cash flows on their enlarged stake.

This makes companies an extra class of traders in the market, with their boards and majority owners having some flexibility in deciding when to buy shares and at what price.

For instance, an investor holding one million shares in a company with 100 million issued shares has a one per cent stake.

If the company buys back 20 per cent of the outstanding shares, the investor will see his interest rise to 1.25 per cent, boosting one’s future dividend income among other distributions.

The practice is common in the developed markets.

Companies making up the Standard & Poor’s 500 Index spent $553.2 billion (Sh58 trillion) in share repurchases last year alone.

Safaricom, however, said Monday it does not have immediate plans to take advantage of the new law.

“Share buybacks require extensive analysis as to the cost benefit, and undertaking this analysis is not currently on our agenda,” said finance director John Tombleson.
While share buybacks are expected to be implemented by firms with obviously undervalued stocks, some firms have repurchased shares on the basis of the market price being lower than their own assessment of the intrinsic value.
This means that repurchases can be carried out at a premium to book value, with the justification that the purchase price is still below the optimal price. This has generated controversy, with some companies accused of using share buybacks to support their share prices, benefiting those selling and eroding value for continuing shareholders.