Issue #15 - Does the company repurchase shares to the investors' advantage?

Retained earnings are portion of earnings re-invested into the company. Remaining portion (if any) is distributed back to shareholders by means of dividends payout, share buyback (or repurchase), or other means which is less common. Having abundance of free cash to implement long term share repurchase program is a trait of company with durable-competitive advantage.

Advantages of share repurchase can be easier understand through a simple example. Company A is own by 3 shareholders, Mr R, S and T each owning 30, 30 and 40 shares respectively. The company earns RM100 every year. Earning per share is RM1. Let's assume the stock price trades at 12X EPS, i.e. RM12 per share. Now, Mr R wanted to sell out and the company repurchases all his shares. At the end of the next year, EPS of the company becomes RM1.43 since there is no change in earning capacity of the business. If stock price continue to trade at 12X EPS, stock price should appreciate to RM17.12. Mr S and T now owns 42.9% and 57.1% without having to fork out additional cash.

Unfortunately, both SP Setia and Island & Peninsular has not been actively repurchasing their share from the open market. However SP Setia has exercise a capital repayment recently (Click here for the proposal and approval). This is another form of returning cash to shareholders but it does not affect the number of outstanding shares of the company.