Share Buybacks (2)

Reasons to keep profits

Successful companies may keep accumulating profits to prepare itself for two general reasons:

i) market down cycles, or

ii) in order to take advantage of opportunities when there is a market/industry correction/sell-down.

Companies should only indulge in share buybacks when accumulated funds are in excess for the above two reasons.

This is because share buybacks will deplete reserves and may not be easily convertible to cash when there is a down cycle or market correction – the time when funds may be needed for those two purposes.

Companies doing share buybacks must and should consider this aspect before embarking on the said exercise.

Even then, the company can still decide on other options to do with the excess cash –

give back to shareholders in the form of dividends or bonus – especially in a matured industry.