QF Share Buyback

[Wod]

Question for our financial gurus.

Why buy back shares?

QF announced and started a buyback scheme in August last year, and at the current rate of about a million shares a day, it will complete at the the end of this calendar year. (QF website - About QF - Investors )

Presumably the million a day average is about using cash flow and not distorting the market price, but what's it all about Alfie?? Having reduced the number of shares on issue, what has been achieved?

Not looking to start another QF bashing game, the buyback is obviously a normal corporate financial option; just that it's a mystery to me.

[Aussie Fo]

I don't profess to be any sought of financial guru but here is my understanding.

When companies (and certainly Qantas does it), issue shares to GD or other managers, as well as the staff issue shares in the past, they are always new shares in the companies, so next year when they go to divide the profit, they will be doing so to last years shares as well as the small amount of new ones they created this year. Hence for the poor old share holders, it means not as much money for them. Doesn't make a lot of difference year to year but over a few it does. If a company has a shareholder reinvestment program it could be much greater.

Companies are also able to structure the buyback in a way that could suit the individual shareholders. Dividends in Australia are often Fully franked, meaning the company has paid the tax on the money already. Hence by buying back the share with a greater dividend at smaller dollar value, the shareholder may be able to artificially create a loss, which they could offset against other shares they sold at a profit, thereby minimizing their personal tax situation.

Finally and this is rather open to personal opinion, by buying back your own shares when a company is making a lot of money (and they may believe it to be cyclical and not long term), and doesn't believe that there are any options out there to buy other business at a earning appreciative price. Or that they believe that their own shares are relatively underpriced. Next year when the profit is announced it will be higher to the number of shares avail, hence increasing the PER ratio, which a lot of people follow to value shares.

Hope this helps and anyone with any brains isn't going to tell you i just told all lies.
:ugh:

[Keg]

Whenever I have questions that I don't know about the finance industry I tend to either have a look at wikipedia or go to a website like this one. (http://beginnersinvest.about.com.htm)

This part (http://beginnersinvest.about.com/cs/newinvestors/a/060401a.htm) has a good burst on share buy backs.

(I have no interest whatsoever in the site or what they're pushing, just an interested observer).

[horserun]

It’s usually a sign that a company is doing well when it buys back share.

Companies like Qantas issue shares in the first place to raise money ( buy aeroplanes etc). When things are going well and there is money in the bank, the company can buy back some of its ‘ownership’.

There are strategic reasons for this, but I’m not to sure what they are.

[altonacrude]

That site's explanation is sort of half right. If the company buys back and cancels 20,000 of its 100,000 outstanding shares then one of the 80,000 that still exist now owns 0.00125% of the company, whereas previously it only represented 0.001%. However the company has spent $1 million to buy back shares, so it is worth $1 million less than it was previously.

In other words a shareholder owns a slightly larger piece of a slightly less valuable company, which might seem a futile exercise.

However it does make sense if company management thinks that the share market is under-valuing the company. Suppose, continuing the same example, the shares were priced at $50 each, but management thought that the company was under-appreciated by investors, had great growth potential and shares should really be valued at $60 each. Then it makes sense to buy for $50 each what it considers are worth $60.

Deciding what a company's shares are worth is not a science as value depends on future earnings not just this year and next year but for years into the future. Without commenting specifically on Qantas, share buy-backs represent one of the tools that corporate treasurers use for optimising use of shareholder funds. If conducted intelligently they have no operational consequences for the company.

[numbskull]

Debt is cheaper than equity(shares) because the interest payments are tax deductable whereas dividend payments are not.

Therefore if the company thinks that their shares are undervalued, they will increase their debt and use the surplus cash to buyback shares.

Amongst other things this will increase earnings per share (same profit/less shares) which should increase the share price in the long term.

Having a more highly geared balance sheet also deters hostile takeover bids somewhat as predators will generally add to the level of debt to try and strip out surplus cash from the balance sheet as they tried to do last year.

This is a very basic explanation of a somewhat more complex issue

[Wod]

Excellent responses.

I'll further my education with Keg's sites.

Thanks

[Going Boeing]

Also, by buying back shares, they have more shares to give to GD, PG, etc. :p

[Wod]

Sorry GB, but even on my limited understanding, the shares bought back are cancelled.

Nice try but no cigar!

[airtags]

Going Boeing:
that too - but more importantly it hands control back to the company (sic the current board) and reduces the propensity for third parties (ie in the case of Q, hedge funds) to frustrate any future agendas.

It is also a means by which to offset the liability of increasing PBIT results
(profit before interest and tax) and significantly frees up capital for debt reduction (or acquisiton ..or funding J* for that matter) instead of paying shareholders dividends.

If you have got shares - hang on to them for the moment anyway.

[cobber_digger_buddy]

numbskull has it about right, but Keg, I'd be careful about recommending wikki-pedia as it has been known to be rather less than accurate and is often rather subjective. i.e It's not validated nor policed, no matter what the owners say. (bit like here)

Simple reason = Share buyback = surplus/eexcess cash on B/S , Cash in Hand (i.e. already on B/S) is at optimum, so how do you best use the excess cash ? (as numbskull says, debt is currently cheaper than dividends, but not for long the way the libs cooked things up)

Reduce the issued #, increase the capitilisation ratio (Total cap Value of Company divided by the number of issued shares, which = share price, look at the smh.com_dot_au to plot the effect of this , easy you can download this into an excel sheet and watch the effect) , and a nice side effect is that each of the remaining/residual shares increases in price.

neat , eh ?


wonder who thought of it........................ :uhoh: ???


Oh , and silly me for not considering this also, the "action"of a share buyback is normally triggered by something, which is what WOD actually asked, and now that I've managed read your question properly.

Only reason for a share-buyback (aside from what numbskull said - i.e excess cash) is that it will be better used than the strike/market rate you'd get for putting that cash in an at-call/money market short term account, that and it increases the equity/resistance of QF external hostile intents, either that or they are planning to consolidate their position for something as yet un-announced.

[Going Boeing]

Wod, yeah, I was aware of that. It was just my attempt at sarcastic humour. GB

[Keg]

cobber digger, I'm sure everyone knows that wikipedia is 'buyer beware'. I only ever use it as one of the sources of information.

[bushy]

i know they are not supposed to, but do they?

[airtags]

bushy
at the last audit prior to the deadline of the APA bid - the answer was no.

The Q Act prescribes the max level of OS interest, however....the share register is not always a precise science in determining the real level of ownership due to the secondary interests and cascade structures.

Like all (good???) self reporting processes ............ the Board can only rely on what information they hold on the registry.

In any event I could'nt imagine the likes of Sissons and the hedgers to sit back and let shares drift too far OS as such a move if in volume lessens their positions of power.

I would however not be surprised to see some covert Q entities issueing buy orders for a bit of short term warehousing ahead of the speculated buy back thrust. This then gives the company some leverage in holding the buy back price down while other shareholders wishing to sell would want an (artificial spike) rise in the price. ....bit like negotiating maintenance contracts eh!