This article first appeared in The Edge Malaysia Weekly on March 11, 2019 - March 17, 2019

MALAYSIA-listed companies jumped on the share buyback bandwagon last year amid the sharp decline in the local stock market following uncertainties brought about by a historic change in government, as well as trade tensions between the US and China.

Last year, share buybacks totalled RM1.56 billion — about six times the RM264 million expended in 2017. The number of companies that utilised the strategy last year also more than doubled to 23, compared with only 10 in the preceding year that bought back more than 2% of their outstanding shares.

Among the corporates that spent heavily on share repurchases last year were YTL Power International Bhd, YTL Corp Bhd, Genting Malaysia Bhd, MyEG Services Bhd and Malakoff Corp Bhd.

They had seen a sharp decline in their share price during the buyback period. YTL Power, YTL Corp and Genting Malaysia lost 32.2%, 23.5% and 44.4% respectively, while MyEG shed a whopping 56%.

Malakoff’s decline was less steep at 13.1%.

According to Rakuten Trade Sdn Bhd vice-president of research Vincent Lau, the share buybacks were reflective of market conditions last year as most companies were impacted by external uncertainties.

“Most of the buybacks were done because of the sharp selldown in the stock market following some of the external shocks that hit the market … The future direction of the companies is intact and the decline in their share prices had led to the stocks selling for less than their intrinsic value. It creates an opportunity for the companies to buy back some of their shares at a significant discount,” Lau tells The Edge.

He believes these activities are positive as they help to stabilise the market in a volatile environment, as seen last year.

Lau, however, stresses that it is important for investors to ensure that the companies that buy back their shares on the open market have a healthy cash flow, and do not need to tap borrowings for that purpose.

Malaysia was not alone in the ramp-up of share buybacks last year.

In the US, companies that normally repatriate their combined US$2.6 trillion held in foreign cash stockpiles, have utilised the extra capital to buy back shares.

Last year, share buybacks in the US stood at a jaw-dropping US$1.1 trillion, prompting an observation by Citigroup Inc that buybacks topped capital expenditures for the first time since 2008.

Over in Japan, share buybacks also hit a record in the recent fiscal year. At present, SoftBank Group Corp, Sony and other companies have announced plans to buy back shares worth more than ¥1.3 trillion (RM47.5 billion).

Short-term hurrah at the expense of long-term benefits?

But these activities have come under increasing attack, especially in the US where politicians are contemplating legislation that revisits buyback rules.

Among their arguments are that the companies would do better to focus on improving wages and benefits for their employees, and to invest in R&D before buying back shares.

Malaysia’s Minority Shareholders Watch Group (MSWG) also has its views.

In the wake of the surge in share buybacks by a number of companies perceived to be linked to the Barisan Nasional administration following the decline in their share prices, the MSWG said, “If a company buys back its shares for the sole purpose of stabilising its share price regardless of the intrinsic value, such action could be tantamount to creating a false market, an offence under the securities laws.”

In a weekly newsletter last year, it urged minority shareholders to take a view on whether they agree that their company undertake a share buyback in the event that the share price is substantially lower than the intrinsic value of the stock.

The watchdog advised minorities to sell their shares in the company if they disagree with the board’s buyback decision.

An analyst with a local research house, however, tells The Edge that most investors and traders look at such strategies positively because they provide an immediate uplift to companies, especially those under selling pressure.

“If you have invested in a company and its share price is falling, it is likely that you will welcome the move. The problem is that most investors or traders look at it as an exit plan. As the share price recovers, they can either take profit or cut their losses, so they would not really mind whether it is for the company’s long-term benefit or not,” he says.

Other positives from share buybacks include an improvement in sentiment (for potential buyers) as the action by management indicates that the share price is substantially lower than the stock’s intrinsic value.

It also decreases the amount of shares outstanding as companies re-absorb a portion of ownership that was previously distributed to investors, leading to improvement in earnings per share (EPS).

There is, however, a growing view that the cash used to repurchase shares is at the expense of capital reinvestment.

MIDF head of research Mohd Redza Abdul Rahman agrees that companies need to prioritise reinvestment for future growth but acknowledges that there is pressure to provide some cash returns to investors, either directly (through dividend payouts) or indirectly (through share buybacks).

He notes that share buybacks are another way to reward shareholders, much like dividend payouts, but they could also help mitigate share price fluctuations.

“If there is no immediate capex (capital expenditure) needs, then dividend returns would be much preferred, considering that there is a limit to the number of times a company can do share buybacks, plus there is a need for shareholders’ approval. For dividends, only a final dividend needs shareholders’ approval. Interim dividends are decided by the board of directors,” says Redza.

FBM KLCI’s dividend payout ratio breaches 60% amid decline in EPS

Redza observes that due to the recent challenging earnings season, companies with an absolute payout commitment would see a higher dividend payout ratio than normal.

Last year, the dividend payout ratio for the FBM KLCI component stocks stood at 62.1%, its highest since 2009. Part of the reason was the decline in the total EPS of component stocks by 23.7% to RM79.69 in 2018 from RM104.47 in 2017.

Redza also notes that for companies that are majority owned by a single owner or with a strong cash pile, there is stronger motivation for a higher dividend payout.

Gan Eng Peng, director of equities strategy and advisory at Affin Hwang Asset Management, believes the higher dividend payout ratio could also be due to lower requirements for capital.

“Typically, when businesses go ex-growth, they do not require as much capital, hence the ability to pay out more, especially if the economic conditions remain stable.

“We saw this among Singapore banks and believe over time, the same could occur for Malaysian banks, which are well capitalised generally,” he adds.

While it is too early to say that Malaysian businesses have reached that point, most investors believe that slower growth will be the new normal.

DBS Group equity research analyst Quah He Wei says the uninspiring earnings outlook is expected to persist in Malaysia this year.

He has revised the investment bank’s corporate 2019 and 2020 earnings growth forecast downwards to 2% and 7.1% respectively, following the dismal fourth quarter 2018 results where more companies under DBS’ coverage underperformed than outperformed.

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