'Directional Search in the Stock Market'... Surge in Share Buyback Announcements

[Asia Economy Reporter Lee Seon-ae] News of listed companies buying back their own shares is flooding in. As the stock market continues to move sideways without a clear direction, it is interpreted as a stock price stabilization measure used to alleviate investors' concerns.

According to the Korea Exchange on the 13th, announcements of share buybacks by listed companies have been on the rise in the second half of the year. From July until last week, 49 KOSPI and KOSDAQ listed companies announced share buybacks. This is an increase of 22.5% (9 companies) compared to the same period last year.

When a company buys back its own shares, the number of shares circulating in the market decreases, which raises earnings per share and typically leads to a rise in stock price. Share buybacks, along with dividends, are considered representative shareholder return policies. Additionally, share buybacks are used as a gauge of the company's stock price level. Since it is perceived as a signal that the stock is undervalued relative to its performance, it often predicts future stock price increases.

According to Daishin Securities, over nine years from 2012 to last February, KOSPI-listed companies that repurchased shares saw their stock prices rise by an average of 8.6% 60 trading days after the announcement. The stock price rose 2.8% after 5 trading days and 5% after 20 trading days. Researcher Cho Seung-bin of Daishin Securities explained, "From a supply and demand perspective, the appearance of a new buying entity in the market can also act as a short-term upward pressure on stock prices."

Meritz Fire & Marine Insurance, which recently announced a share buyback, matched this pattern. After announcing a 90 billion KRW share buyback on the 31st of last month, Meritz Fire & Marine Insurance’s stock price rose nearly 10% on the 1st. The upward trend continued, closing at 33,100 KRW on the 10th. Meritz Financial Group, which announced a 50 billion KRW share buyback on the 30th of last month, also saw an unstoppable rise in its stock price. The price surged from the 27,000 KRW range to around 38,000 KRW as of the 10th, setting a 52-week high.

Kim Do-ha, a researcher at Hanwha Investment & Securities, said, "Meritz Fire & Marine Insurance’s stock price fell 18% right after announcing a 10% cut in dividend payout ratio based on separate net income in May, but after announcing the share buyback decision last month, the stock price rose about 30%. A strong supply and demand effect is expected during the third share buyback process."

In the first half of the year, companies such as SIMPAC, LG, Lock&Lock, Hanwha Aerospace, Hyundai Marine & Fire Insurance, Hyundai Department Store, Mirae Asset Life Insurance, NHN, and JW Life Science experienced stock price increases due to share buybacks.

However, caution is required. There are cases where the formula does not hold. Hanwha Solutions and Hyundai Mobis, which bought back shares in the first half, saw their stock prices fall more than 13% during the buyback period. On the 7th, NCSoft announced it would buy back 300,000 shares for 189.9 billion KRW to stabilize its stock price, but the market reaction has yet to materialize. NCSoft’s stock price fell 26.4% from the 26th of last month, when it released its new game 'Blade & Soul 2,' until the 7th. During this period, its market capitalization decreased by about 4.8518 trillion KRW. The stock closed at 616,000 KRW on the 7th and slightly declined to close at 607,000 KRW on the 10th.

Accordingly, there is growing attention on whether the repurchased shares will be retired. If the shares are reintroduced into the market, the circulating supply increases, which may diminish the stock price boosting effect. The Korea Capital Market Institute stated, "If shares are not retired, companies may resell them when the stock price rises or use them as a defense mechanism for management control, so it is important to pay attention to the actual acquisition status and whether the shares are re-disposed. Furthermore, investors should focus on the company's long-term value rather than the temporary effects of share buybacks when making decisions."

This content was produced with the assistance of AI translation services.