Lecture 4 (Chapter 1). Share Buybacks

If a stock split is like breaking a R100 note into smaller change, a buyback (or "share repurchase") is almost the opposite move: the company uses its own cash to buy back its own shares from the market and then usually cancels them.

A real example: between October 2025 and March 2026, Old Mutual Limited (one of South Africa's largest financial services groups, listed on the JSE) repurchased just over 147 million of its own shares, spending roughly R2.07 billion to do it - about 3.12% of all its shares in issue at the time. Most of those shares were then de-listed and cancelled entirely, permanently shrinking the total number of Old Mutual shares in existence.

Why would a company buy back its own shares?

Think about a pizza cut into 8 slices, shared among 8 people. Each person owns 1/8 of the pizza. Now imagine one person leaves and gives their slice back to be removed entirely. The pizza is now cut into 7 slices among 7 people. Nobody's slice got physically bigger, but each remaining person now owns a larger percentage of the whole pizza.

That's exactly what a buyback does to a company's profits and value:

• Fewer shares outstanding means each remaining share represents a bigger slice of the company.
• This typically boosts earnings per share (EPS) - the same total profit is now divided among fewer shares.
• It can also support the share price, since demand (the company buying) increases while supply (available shares) shrinks.

Why do companies do this instead of, say, paying a bigger dividend?

A few reasons:

1. Flexibility: a buyback is a one-off decision. A dividend increase creates an expectation that shareholders will get used to, and cutting it later looks bad.
2. Signal of confidence: management is essentially saying "we believe our own shares are good value right now."
3. Tax treatment: depending on the shareholder's situation, buybacks can sometimes be more tax-efficient than dividends (this varies, and isn't something to assume blindly).

A word of caution for beginners: a buyback isn't automatically a good sign. Sometimes companies buy back shares because they genuinely have excess cash and nothing better to invest it in a decent sign. Other times, it's used to artificially prop up a struggling share price or flatter earnings-per-share figures without real underlying growth. As with everything in investing, the reason behind the action matters more than the action itself.

Quick recap so far: a split divides the pie into more, smaller slices (nothing changes in total). A buyback removes slices from circulation entirely, so everyone left holds a bigger piece.