SINGAPORE (Jan 11): Last year, the Straits Times Index lost 10.5%, owing to a range of global and domestic factors. Amid the plunge, many locally listed companies took the opportunity to buy back their own shares.

According to SGX My Gateway, the value of share buybacks more than trebled to $1.53 billion in 2018, from $426 million in 2017. The figure was also higher than the $826 million worth of share buybacks recorded in 2016, but lower than the $2 billion worth of share buybacks registered in 2015.

The share buybacks were conducted by 100 Mainboard-listed companies, according to SGX My Gateway. About 80% of the shares in terms of value were bought by STI constituent companies. Compared with their combined market value as at end-2018, however, the value of the share buybacks was “small change”, SGX My Gateway says.

Companies buy back shares for different reasons, but they usually revolve around the efficient allocation of capital in the light of market volatility.

According to one investment banker, share buybacks typically occur when companies have excess cash and their shares are deemed to be undervalued. This excess cash could be the result of a lack of investment opportunities or other corporate purposes. Rather than letting it become idle, companies may choose to reduce their paid-up capital.

According to another banker, companies may prefer to conduct share buybacks rather than pay more dividends because the latter creates an expectation of at least committing to a new payout level.

In addition, companies may conduct share buybacks to provide share schemes to their employees. Shares bought are converted to treasury shares, which in turn are awarded to deserving staff, the second banker adds.

Find out more in this week’s issue of The Edge Singapore (Issue 863, week of Dec 31), on sale now at newsstands.

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