Share buyback activities of HK and Mainland shares have also picked up, as the number of buybacks in 2018 almost reached a historic high. Media reported as of November 13, that there had been more than 3,300 share buybacks amounting to around HK$49.5 billion in HK. Notably, large buybacks included Link Reit, HSBC, Tencent, Lifestyle International, together with a number of Mainland property developers. The total value of share buybacks announced in 2018 is more than the combined value of 2015, 2016 and 2017.
Corporate entities who choose the option of a share buyback instead of paying dividends explained that some of the key motives behind the buybacks were to restore investor confidence in the share price, to ensure the share price fairly reflected the company’s value, and to incentivize those staff who were compensated partly by shares.
Will 2019 be another strong year for buyback activities? New rules announced by mainland exchanges allow firms to raise funds from bond issuance and bank loans to fund share buybacks. It seems likely therefore that share buybacks will continue to be a trend.
As investors, we should not only consider a share buyback as potentially increasing EPS, but we should also assess whether the companies have an adequate free operating cash flow to support the buyback activities. If companies use the buyback as a way to improve share prices without a sensible cash flow management policy, any improvement in the share price is unlikely to be sustainable in the longer term.