Don Wehby, Contributor
An employee of the Jamaica Stock Exchange scrutinises the day's trading at the JSE's offices in Kingston on September 28, 2004. - ANDREW SMITH /PHOTOGRAPHY EDITOR
THE JAMAICA Stock Exchange's (JSE) Rule 413 deals with a company's purchasing of its own shares. Under Rule 413, share buy-backs are allowable either by open market repurchases or by self-tender offer made to all shareholders.
The rules also give specific disclosure requirements. The JSE must be notified at least 21 days before the purchase, and again within 10 days after it. The notifications are to include the purpose for the purchase or acquisition; the maximum number of shares intended to be purchased or acquired and the number of shares actually purchased or acquired; the effective date of the purchase or acquisition; the price or other consideration to be provided for the purchase or acquisition; the source of funding for the purchase or acquisition; the method of effecting the purchase or acquisition by Self Tender or Open Market, and all other information that is relevant to the transaction.
FLEXIBILITY
Share repurchases are used in developed markets to add greater flexibility to ways in which companies may return value to investors. Instead of issuing dividends, a company may buy back its own shares, which would result in a proportional increase in the share value. Where dividends are taxed at a higher rate than capital gains, many investors will prefer buy-backs to dividends. In fact, the capital gain would not even be taxable until the shareholder sells the stock.
There are a number of other reasons for share repurchases. A company may buy its own stock at times when it feels its stock price is unjustifiably low on the open market. In this way, buy-backs can be an important signal to the market. Where there is excess liquidity in the market keeping the price down, a repurchase can serve to mop it up.
Earnings per share (EPS) can be increased through share repurchases, as in the following example. If a company with 1,000 shares outstanding has net income of $100, the EPS is $0.10. If the company buys back 200 shares, EPS increases to 100/800 = $0.125.
Repurchased shares may facilitate employee compensation plans, either directly as a source of stocks for options, or indirectly as a counter to the dilution caused by issuing shares to employees.
According to the Securities Data Corporation, from 1987 to 2000 U.S. firms bought back US$1 trillion of their own shares, with new firms adding buy-back programmes at the rate of 100 per month during 1999 and 2000. In fact, most of the buy-backs occurred in the last few years, indicating a strong and continuing growth. For example, in 1996 1,475 companies bought back US$177 billion of stock, whereas in 1992 and 1993 combined 600 firms repurchased US$40 billion.
In the Caribbean, buy-backs have been allowable in Barbados and Trinidad for some time. Major regional companies, such as Goddard Enterprises and Cave Shepherd, have repurchased shares in recent years. Most companies limit repurchases during any one year to 10 per cent of outstanding shares at a maximum. In a global context, recently announced buy-back programmes include German banking powerhouse Deutsche Bank, energy giant Royal Dutch Shell, global financial rating service Moody's, U.S. Congress-chartered mortgage corporation Freddie Mac (Federal Home Loan Mortgage Corporation) and technology behemoth Microsoft, which has returned US$87 billion to shareholders via buy-backs from 2001 to the most recent quarter.
For a company with a strong cash position and with confidence that its range of products and services will continue to enjoy success in the market, a stock repurchase represents a sound and attractive opportunity. However, where stocks are overpriced, share buy-backs can have a negative effect on shareholder value, as the company's cash would be used to purchase an asset of lower value. A buy-back is an excellent way for a company to signal the continuing confidence that its board and management have in the business as well as the ongoing commitment to returning value to shareholders.
The Jamaica Stock Exchange must be congratulated, as the amendment to the rules is a positive move towards developing a more efficient capital market in Jamaica and the wider Caribbean.
We now need to move towards the harmonisation of the tax laws and the rules of the four exchanges in the Caribbean. With globalisation and the size of our market, it is my opinion that we have no choice.
