“Not so fast Mr. Odusote.” Odili scratched his bald head as he adjusted his glasses. “Share buyback reduces cash flow that could be used to generate revenue, increase earnings, and pay dividends. It affects operations and makes for a riskier balance sheet. In my experience, a company should only buy back its shares when they‘re trading below the expected value and where there are no better investment opportunities or better use and allocation of capital…”
Edward nodded, “I agree with you Odili. Investors perceive buybacks as a sign of poor performance or that management has run out of ideas. At this stage we can‘t afford the luxury of mixed signals to the market. Bestman Group is just over two years old. It would be detrimental if we had fewer growth opportunities owing to cash shortages from share buy back.”
“You won‘t regret it if you do. This is because your stock gets greater value; you have fewer dividend payouts, better ratios, growth rates and return on investment. You also have better financials with higher earnings per share making it a dream investment option.” Odili shook his head. “I‘m afraid that if we go with your proposal to buy back and reissue shares, management energies will be diverted from our business to stock market games…”
“And that‘s without mentioning the legality of the whole affair.” Benibo joined in the exchange for the first time. “Neither the Companies and Allied Matters Act nor the Investment and Securities Act have any provision for companies to buy back their shares…”
Odili was like a man renewed; this tied back to what they‘d been discussing with the banker earlier. “That‘s as it should be. When a company buys back its shares, such company would be reducing their capital. Therefore, I see why the SEC does not allow companies to do that under normal circumstances. If companies are allowed to buy back their shares, it means they would have to use the shareholders‘ fund which is not acceptable.”
Kanayo took the bait. “It‘s important for the SEC to differentiate the issue of companies‘ capitalization from their solvency. Large capitalization does not translate to solvency of a company. SEC and investors should not be overly concerned about capitalization of PLCs‘, but rather the emphasis should be placed on the fundamental strength of a company. Banks are the biggest players in the equity stock market and these restrictions do not favor us.”