By Ruma Dubey
The market was thrilled with the news that the Board of TCS is meeting on the 20th of Feb to consider buy back of shares. And the free advice being doled out by analysts is that Infosys and Wipro should also do the same.
There is no question that this idea for a buy back has emerged on the back of the current pessimistic outlook painted for IT stocks, post Trump taking over. And the idea is that a buy back will keep the sentiments buoyant and help perk up the share price.
At this juncture, when growth will remain sluggish, a buy back for TCS and even for Infosys and Wipro makes perfect sense. As at 31st Dec’16, TCS generated free cash flow of $2.68 billion and over 30% of its total assets held is in the form of cash and cash equivalents.
Sitting on idle cash, that too so much cash, does not make any sense. So why not a buyback with some of that money? Many are asking, why not a bonus or a big dividend? Yes, these two would go on to reward the shareholders but not the company directly.
There are distinct advantages to a buy back. When we are talking about a buy back, we are talking about a company buying back its outstanding shares, which are shares in the public domain, outside its control. Either by buying it back itself from the open market or by putting up an offer to existing stock holders at a fixed price. Shareholders benefit even if they do not sell – because it reduces the number of shares even though there is no change in earnings; this means a higher EPS. This is the opposite of bonus – we do get more shares but the capital goes up and EPS goes down. Another added advantage – by using the cash, it means assets go down which in turn means the Return on Assets ratio actually improves and Return on Equity also goes up as number of outstanding shares reduces. Thus financially, there are most certainly many advantages.
At the same time, for a company like Infosys and TCS, which has huge employee stock options, buying back shares would mean there would be reduced risk of dilution while increasing shareholder value.
Buy back also helps improve a stock price. When the stock price is deeply discounted, when price is pummeled due to weaker earnings, when management invests its cash in buying back shares, the message sent across is – the market is being unfair in discounting the share price and it is there to shore up.
Even if we look at things from the FIIs point of view, buy back makes sense. Apple in USA, spurred by its huge pile of cash and a near zero percentage interest rate, is giving its shareholders the highest returns ever. Its stock price is up 25% ever since it spent $18 billion on its own shares between January and March. As per data compiled by Bloomberg and Standard & Poor’s, this is the highest four-month returns among the 20 biggest quarterly repurchases by any company since 1998. On the other hand, IBM was on a share buy back spree, not with the objective of shoring up its holding but to boost its EPS. Our very own conglomerate, Reliance Industries in Feb’12 had bought back 46.24 million shares of Rs 3,366 crore from public shareholders. In fact it also declared a bonus.
Well, buyback is a good idea for TCS and Infosys and this is the only way to boost shareholder confidence!