Why do companies buy back shares?

IN EARLY November, DBS’ board established a new S$3 billion share buyback programme which involves purchasing its own shares from the open market. When they are cancelled, the bank’s equity will be correspondingly reduced.

The programme is expected to provide a “permanent lift” to earnings per share (EPS), in addition to a higher return on equity (ROE), DBS said.

UOB, meanwhile, said at its earnings briefing in the same month that it is open to investing its excess capital or returning it to shareholders – either through share buybacks or more dividends.

Share buyback schemes are common among companies. In the first week of November, seven primary-listed companies conducted buybacks over the five trading sessions, with a total consideration of S$3.4 million.

ST Engineering led the consideration tally after buying back 512,900 shares at an average price of S$4.51 per share on Nov 1.

Digital Core Reit Management, meanwhile, acquired 303,000 units of the real estate investment trust on Nov 7, bringing the total units repurchased to nearly 1.3 per cent of its issued units since the beginning of the current mandate.

The Business Times explains what share buybacks are, why companies undertake such an exercise and explores the potential downside.

What is a share buyback scheme?

A share repurchase is when a company buys back its shares from the open market, using its accumulated cash. For example, SIA Engineering recently bought back 290,100 shares at an average price of S$2.46 per share. The group reported that its revenue for the first-half ended FY2025 rose 12.1 per cent on the year to S$576.2 million.

The company then cancels the shares it has bought back. This reduces the number of shares outstanding, resulting in a smaller equity base.

Why do companies undertake share buybacks? 

There are several reasons:

Deploying excess cash to reduce the number of outstanding shares can indirectly reward existing shareholders and boost the company’s earnings per share, said Paul Lee, chief executive and chief investment officer of Paragon Capital Management. 

• Even after the full S$3 billion is spent on buying back the shares, DBS is said to retain about S$6 billion in Common Equity Tier-1 excess capital – above its targeted range of 12.5 to 13.5 per cent. The lender will still have around S$3 billion to S$5 billion in capital to return to shareholders, said DBS chief executive Piyush Gupta.

• The scheme indicates to the market and investors that a company is “financially strong enough” to return excess capital to shareholders, while “retaining enough capital for ongoing operations, buffers for rainy days, and foreseeable investments”, added Lee.

With a smaller number of outstanding shares, EPS will be boosted. Also, a company’s ROE rises. ROE is a key metric that is calculated by dividing a company’s net profit by its shareholders’ equity. It improves when net profit is higher and/or when the amount of equity is reduced.

Share buybacks are also increasingly important for smaller listed companies, said head of research at Phillip Securities Research Paul Chew. 

• “With the rise of indexing and passive investing, there is reduced interest and capital directed towards smaller firms, making capital returns like buybacks more critical,” he said. 

As global interest rates head lower, more companies may turn to share buybacks. 

Downsides of share buyback schemes

The scheme may indicate that the company does not have any profitable opportunities to invest in – a red flag to long-term investors looking for capital appreciation.

Maybank Research analyst Jarick Seet said share buybacks could also indicate that a company is not using its cash efficiently to grow the business, or that growth is limited, hence the excess cash is not needed, he added.

Paragon’s Lee also noted that a company buying back shares may suggest it has not found “better investment opportunities”.

“They may have various investment opportunities but do not see them as compelling enough. All part and parcel of business management,” he said.

Phillip Securities’ Chew said: “The value of buybacks ultimately depends on the timing and valuation of the shares repurchased,” he said. “When done appropriately, buybacks can improve a company’s financials while returning capital to shareholders.”

However, companies should be careful, if buying back shares at high valuations, especially if they borrow to finance the scheme, he added.

He cautioned that not all industries or companies are well-suited for buybacks; it must be balanced with the company’s ability to access capital.