Companies Engaging in Share Buybacks to Appease Shareholders

원본보기 아이콘

[Asia Economy Reporter Myung-Hwan Lee] The number of companies announcing share buybacks as part of their shareholder return policies in the first quarter of this year increased by more than 60% compared to the same period last year. This is interpreted as companies attempting to appease shareholders amid the domestic stock market's continuous sluggishness due to concerns over the Ukraine war and the U.S. Federal Reserve's (Fed) interest rate hikes. Experts advise evaluating the long-term value of companies, cautioning that share buybacks may only have a temporary effect.

According to the Korea Exchange on the 20th, there were a total of 121 share buyback announcements in the domestic stock market?including KOSPI, KOSDAQ, and KONEX?in the first quarter of this year. This represents a 61.33% increase compared to the 75 announcements in the first quarter of last year.

Share buybacks are considered a representative shareholder return policy. When a company repurchases its shares circulating in the market, the number of outstanding shares decreases, which improves earnings per share (EPS). In 2020, when the domestic stock market was hit hard and plunged due to COVID-19, 418 share buyback announcements were made in the first quarter alone. Considering that the total number of share buyback announcements in 2019 was 291, the first quarter of 2020 saw more buybacks than the entire previous year.

The reasons companies have given for share buybacks also point to shareholder returns. Shinhan Financial Group announced last month that it would repurchase and cancel treasury shares worth around 150 billion KRW, stating, "After establishing the holding company last year, we achieved the highest net income and want to sufficiently reflect this in shareholder value." SK Chemicals also announced a share buyback worth around 50 billion KRW last month, describing it as a decision to enhance shareholder value.

The stock prices of companies that repurchased shares showed short-term improvement. The stock prices of companies announcing share buybacks in the first quarter of this year rose by an average of 2.87% one week after the announcement. The increase was even greater one month later, with an average rise of 4.80%. Companies that announced share buybacks last year also recorded average returns of 2.54% one week after the announcement and 5.05% one month later.

However, if companies do not cancel the repurchased shares and instead dispose of them in the market after a certain period, the effect may be only temporary. Therefore, it is pointed out that the handling method after share buybacks should be examined. In the case of share buybacks through trusts, the actual implementation results may vary due to institutional characteristics, so caution is needed. Direct buybacks require completion within three months and the announcement of a results report, but trust buybacks have no obligation to complete repurchases within a short period and have relatively lax disclosure requirements.

So-Hyun Kang, a research fellow at the Korea Capital Market Institute, said in a report published last year, "In a situation where uncertainty continues due to COVID-19 and economic recovery is sluggish, evaluations of share buybacks should be conducted carefully," advising, "Investors should assess shareholder return effects based on the company's long-term value rather than the fragmentary and temporary effects brought by share buybacks."

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.