Share Buy Backs

Announcements of company share buy-backs are common place. Why do companies buy-back shares?

Some of the main reasons are:

• To distribute excess profits back to shareholders
• Allow shareholders of small companies that are seldom traded on the ASX an opportunity to sell their shares.
• Cut the administrative costs associated with having lots of small shareholders.

Companies have several options in how they can perform a buy-back. They include:

• An On-market buy back - where the company will buy directly from the ASX, they announce the period that they will conduct the buy-back (i.e. Sept - Nov) and the maximum price they will pay.
• An equal access scheme - when the company offers to buy back the same proportion of each shareholder's shares.
• A selective buy-back - when the company offers to buy back shares from only one or some of its shareholders.

Occasionally shareholders may be required to approve the share buy back. Each shareholder, whose shares the company wants to buy back, will receive an offer. Each shareholder must then decide whether they want to sell their shares.

"Why would you sell your shares if, on the face of it, the remuneration was less than the market value of the shares?"

The answer is the taxation treatment of the buy-back. Under normal circumstances Capital Gains Tax is payable on any profit when you sell shares. However, the ATO may agree to different treatment depending upon the way the buy-back is conducted. The dividend is fully-franked so superannuation funds and charities that pay no tax or 15 per cent get a refund cheque from the Tax Office. Additionally, individuals who pay less than 30 per cent tax also benefited greatly.

How does a trader/investor profit from the buy-back?

Assuming that your tax situation allows you to benefit from the discounted offer price and the franking credits there is reason to participate. In practical terms, the buy back can also place a floor under the share price, giving stability to the share price.

On occasion, investors who participate in the buy-backs reinvest their profits into the company as the company share price increases thanks to the underlying support initiated by the buy back.

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