Let's look at the example of
shares buy back. If the company A total outstanding shares is 10,000,000
shares and the company decided to buy back 10% or 1,000,000 shares, the
outstanding shares will be reduced by 10% to 9,000,000 and the EPS in
short will be increased by 11%. If the overall situation do not change,
you would need the shares price to go up by 11% to back the previous PE
level.
Of course you would say this is just a
theory, and the current market situation might not react like what
theory would predict. Some investors would think that the company have
wasted the money in doing something not creating the "real" fortune to
the shareholders. They would prefer the company to spend the money on
something that is good for future investment. For example, YTL Power has
loaded money, but if they keep on buy back the shares and do not have
any good investment in future, then this will not attract investors who
are looking for future growth.
However, if you
distribute the excess cash back to shareholders, it only give benefits
to those who like steady cash flow income and do not really fancy of
capital appreciation game. Anyway as we do not pay for capital gain in
Singapore and Malaysia, it is wise for us to re-invest the dividend back
to the counters and enjoy the future ride of the share price later.
Above are just my thought on shares buy back and dividend payout. I welcome your feedback in this topic.
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