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Share buybacks are the new dividends
Shareholders invest in publicly traded companies for capital appreciation and income. There are two main ways in which a company returns profits to its shareholders – cash dividends and share buybacks.
Companies these days are loathe to increase dividends – because if a dividend cannot be sustained investors punish companies.
But share buybacks is another way to provide investors with returns – without creating expectations of recurring buybacks.
According to Wells Fargo US companies spent $266 billion on share buybacks in the in 2020 – despite the Covid pandemic.
So clearly share buybacks are a popular option these days. And when companies get to buy back their own shares at a huge discount – like many shares are trading at now it is even better for investors.
In fact, share buybacks could be attractive as dividends on the JSE right now.
Why share buybacks are just as hot as big dividends right now
• Dividends attract tax immediately – When you receive a dividend 20% tax is levied on it – meaning you lose a significant portion of your return immediately. There aren’t really ways for you to lower the amount of tax you pay on these dividends. On the flipside – if a company does a share buyback and its share price rises as a result thereof there is no tax payable by you – until you sell your shares. And even then – you pay capital gains tax at a maximum of 18% and you get an annual exclusion on the first R40,000 capital gains you make each year.
• Once a dividend is paid the money is gone – Once a company pays a dividend the cash is gone and won’t have any effect on the company or its share’s future performance. Share buybacks differ from this… You see, if a company buys back shares its total shares in issue shrinks and thereby its earnings per share increases – even if profits remain flat in the future.
• Share buybacks actually HELP when a share is undervalued – When a share is undervalued a dividend often doesn’t make a difference. But share buybacks can actually push the price of a share upward if the company does it when the share is under-priced!
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This penny share just did a massive share repurchase – and its already pushing up its price
Argent Industrial spent much of the past three years on restructuring its business. It’s gotten rid of subsidiaries that weren’t contributing and it’s bought businesses (offshore) that are adding value.
Because of some of the transactions the company’s done it is cash flush – and its shares are really cheap.
So, it is in the process of buying back shares on the market.
In fact, it has been buying back its own shares for years now. In March 2021 it was around R1.84 million worth of shares. Between December 2020 and February 2021 it was around R1 million worth of shares (at an average of R8.70) a share compared to the current R11.36).
Between November and December 2020 the company bought back a whopping R9.72 million worth of shares at nearly half the current share price (averaged R6.40 per share).
By buying back large amounts of shares like this, companies increase their PER SHARE PROFITS. That means, if you hold on to your shares you end up owning a larger % of the company in total.
Thanks to this Argent shares are up 164% in the past year, and there’s more upside potential…
But there are other companies also doing these share repurchases. Ones I really like include Caxton, Insimbi and Onelogix…
You should definitely keep an eye out. There are many JSE listed companies selling at 20%, 30% and even 50% discounts to their real value, and they are taking advantage of this, buying back their own shares in the open market. Sooner or later – the benefits of this plays out and the share prices soar!
Here’s to unleashing real value
Editor, Red Hot Penny Shares