Why would an investment company spend colossal amount of cash on buying its own shares? Here are five reasons
Nairobi Securities Exchange listed firm, Centum Investment opened its share buyback offer on February 6, 2023 after an approval from its shareholders and the Capital Markets Authority in an effort to stabilize the company’s share price which has fallen from Sh80 in September 2014 to Sh9 as of February 9.
The company has set aside Sh600.8 million to go towards buying 66.5 million shares from its shareholders within a period of 18 months, with a maximum share price set at Sh9.03 and minimum if 50 cents. Here are five reasons a company would embark on buying its own shares:
Preserve stock price
Analysts say stock buybacks preserve the stock price and tend to have a more direct and positive impact on the stock markets, as they lead to rising stock prices. Centum’s share repurchase is expected to stabilize the company’s share price and market valuation in the long term. Here are four reasons
If a stock is undervalued
Another major motive for companies to buyback shares is if they genuinely feel their shares are undervalued. Centum feels its stock is undervalued and that could be one of the reasons to buy back shares looking to make it more attractive.
Reduce cost of equity capital
Stock repurchases are a smart way to reduce the cost of equity capital. Many shareholders expect returns from their investments in terms of dividends, which is a cost of equity. That is why Centum buying back 66.5 million of the outstanding shares will pay off investors and reduce the overall cost of capital.
Consolidate ownership
Companies go the stock buybacks route in order to consolidate ownership. By buying back shares, Centum reduces the number of owners, voters, and claims to capital. At the end of it all, the firm’s outstanding number of shares is expected to reduce to 598.9 million.
To increase earnings
Buying back shares can also be an easy way to make a company look more attractive to investors. Share buybacks reduce the number of outstanding shares, thereby increasing a company’s earnings per share (EPS) ratio. This increases the demand for shares and could inflate stock valuation. – From Abojani Investment
