Zim companies in share buybacks

HARARE - Zimbabwean companies are embarking on a share buyback spree in an effort to preserve shareholder value and boost earnings per share.

Last week, Zimre Holdings and Pearl Properties announced their intention to embark on share buybacks.

Companies buy back their shares for various reasons. They do it when they believe their shares are undervalued, or to make use of cash or cheap debt financing when business conditions do not justify capital or research and development spending.

They also do it to meet the expectations of increasingly demanding investors.

Buyback proponents say they reward these long-term shareholders by effectively increasing their ownership of the company, and they help boost the value of a stock by raising the company’s earnings per share.

And when there’s no other compelling use for a company’s cash, this is a better alternative than risky spending on takeovers or other big investments.

But the other view on buybacks is that their only impact is in making things look better than they seem. Yes, earnings per share rise, but that’s not because earnings are growing.

South Africa-based equities analyst, Cynthia Ndlovu, said most publicly-traded companies reward top managers for hitting performance targets, meant to tie the interests of managers and shareholders together.

“At many big companies, those interests are deemed to be best aligned by linking executive performance to earnings per share, along with measures derived from the company’s stock price.

“But these metrics may not be solely a reflection of a company’s operating performance. They can be, and often are, influenced through stock repurchases,” she said.

Ndlovu further indicated that in addition to cutting the number of a company’s shares outstanding, and thus lifting earnings per share, buybacks also increase demand for the shares, usually providing a lift to the share price, which affects other performance markers.

Other market experts assert that while buybacks can be a good strategy if management thinks the company’s shares are undervalued, they also mean less money left for companies to use on capital expenditures and other investments.

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