“Why Companies Like DBS and ST Engineering Are Betting Big on Share Buybacks—And the Risks Investors Should Know”

“Why Companies Like DBS and ST Engineering Are Betting Big on Share Buybacks—And the Risks Investors Should Know”

Singapore-listed companies, including heavyweights like DBS and ST Engineering, are making waves with substantial share buyback programs this year. While these initiatives are lauded for boosting shareholder returns and improving key financial metrics, they also raise critical questions about long-term growth strategies.

The Rise of Share Buybacks

In November, DBS announced a S$3 billion share buyback program designed to permanently lift earnings per share (EPS) and return on equity (ROE). Similarly, ST Engineering led buyback efforts in the same month, purchasing 512,900 shares at an average price of S$4.51. The activity underscores a trend: in the first week of November alone, seven Singapore Exchange-listed companies conducted buybacks worth S$3.4 million.

The practice, which involves a company repurchasing its own shares from the open market, has gained traction. Once the shares are canceled, the company’s equity base shrinks, boosting EPS and potentially raising the stock price.

Why Companies Are Buying Back Shares

1. Boosting Shareholder Value:
   Share buybacks are a way to deploy excess cash to reward shareholders indirectly. Reducing outstanding shares enhances key metrics like EPS and ROE, making the company more attractive to investors. DBS CEO Piyush Gupta noted that even after its S$3 billion buyback program, the bank will retain significant excess capital for operations and future investments.
2. Signaling Financial Strength:
   Buybacks signal to investors that a company is financially robust, capable of returning capital to shareholders while retaining sufficient reserves for growth.
3. Capital Returns Amid Low Interest Rates:
   In a low-interest-rate environment, buybacks can be more appealing than holding excess cash in low-yield accounts. Analysts predict that as global rates trend downward, more companies will turn to share repurchases.
4. Competing for Investor Attention:
   With the rise of passive index investing, smaller companies often struggle to attract capital. Buybacks are a critical tool for these firms to enhance returns and retain investor interest.

The Downsides of Buybacks

While share repurchases have clear benefits, they come with notable risks and trade-offs:

• Missed Growth Opportunities:
  A buyback program might suggest a lack of profitable investment opportunities. Long-term investors looking for growth may view this as a red flag.
• Inefficient Use of Capital:
  Critics argue that buybacks can indicate inefficient use of cash, particularly if a company lacks a clear growth trajectory or borrows to finance the scheme.
• Timing and Valuation Risks:
  Buying back shares at inflated valuations can be detrimental, eroding shareholder value. Companies must balance the timing and valuation of repurchases to ensure long-term benefits.
• Alternative to Dividends:
  While share buybacks reduce outstanding shares, dividends directly reward shareholders without altering the company’s capital base. OCBC CEO Helen Wong has highlighted dividends as an equally effective option for returning capital.

Expert Perspectives

Paul Lee, CEO of Paragon Capital Management, noted that share buybacks reflect business management decisions and market conditions. “They may have investment opportunities but do not see them as compelling enough,” he said. Jarick Seet, an analyst at Maybank Research, cautioned that buybacks might indicate limited growth potential or inefficient capital deployment.

However, when executed appropriately, buybacks can bolster financials and improve investor sentiment. “The value of buybacks ultimately depends on timing and valuation,” added Phillip Securities’ Paul Chew.

A Balancing Act

As companies like DBS and ST Engineering make headlines with buyback initiatives, the debate continues over their long-term impact. For investors, the key is to evaluate whether these programs align with sustainable growth strategies—or simply signal a lack of better options.

As buybacks remain a popular tool for capital management, their effectiveness will depend on how companies balance immediate shareholder returns with future growth ambitions.

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