On Thursday last week, Econet shareholders approved a resolution to allow the company’s directors to buyback the company’s shares in the next 12 months. This isn’t newsworthy in itself. Econet has always had this resolution at most of its Annual General Meetings (AGMs).
In fact, most Zimbabwe Stock Exchange listed entities always seek approval to buy back shares at their AGMs.
Proponents of share buybacks believe there are numerous reasons why it may be beneficial to a business to repurchase its shares, including ownership consolidation, undervaluation, and boosting financial ratios.
For example a share buyback reduces the number of shares outstanding and in the process increase the earnings per share growth rate for a company. In its simplest form, a reduction in shares outstanding has a direct inverse relationship to earnings per share and at a constant price/earnings ratio will drive the stock price higher.
But the latest resolution is different. Econet is not seeking to buyback the usual 10 percent of the company’s shares in issue. The latest approval is for the company to buy a maximum 20 percent of the issued shares.
Responding to emailed questions, executive assistant to Econet’s Group CEO Lovemore Nyatsine said the company’s foreign investors prefer the company to pursue share buybacks than paying cash dividends.
“Foreign investors had indicated to the company that they prefer the company to pursue share buybacks as opposed to cash dividends because the foreign shareholders are experiencing delays in repatriating their dividends to their countries of domicile,” said Nyatsine.
He however, noted that local shareholders prefer cash dividends. On why the company was not deploying cash into expansion projects, Nyatsine said the challenge was in the non-availability of foreign currency.
“Business opportunities are available in the country. However, in a TMT business, which requires a lot of technology input from outside the country, such opportunities are limited by the availability of foreign currency.”
Market analysts also believe the decision speaks to the current operating environment, where companies are finding it hard to deploy cash resources into capital expenditure or other expansion projects. As a result buying back shares could be the best option as it helps in value preservation.
“Even if the company was looking at expanding, the nature of its business it has to bring in equipment and accessories from outside the country, but at the moment that might not fit into the Reserve Bank of Zimbabwe’s priority list.
“So like everybody else they might as well buyback their shares and make use of the cash pile,” said Walter Mandeya, a local analyst.
How about distributing cash reserves to shareholders?
Dividends are one of the most attractive alternatives to buybacks. Sharing profits with your shareholders, at a strong yield that is not in danger of curtailment, is a great way to endear your company to the market.
But from a tax point of view, a share buyback could be more beneficial to the shareholders than getting a dividend.
Dividends are taxed at either 10 percent or no tax at all depending on the person being paid. When the company buys shares the statutory charge that apply is 1,7 percent. Effectively, it is cheaper to buy back shares than receive a cash dividend.
Another reason why Econet shareholders might not be keen to get a dividend is that the majority of them are living outside our borders, and paying a dividend wouldn’t make sense as the beneficiary shareholders would struggle to repatriate the earnings. As for local shareholders, we are also seeing a trend where cash is no longer king with the ZSE breaching record levels and now trading in uncharted territories.
Analysts have attributed this to the need to hedge against currency concerns. Bank balances are currently trading at a 30 to 40 percent discount to hard cash notes, making it risky to keep holding on to huge bank balances.
Given that scenario Econet does not need it’s all available money to protect or expand its own operations. As at February 28, 2017 Econet had cash and cash equivalents amounting to $185 million.
But what use is cash in bank when it can’t even earn you interest. The decision to keep cash or use it is also based on factors such as the current interest rates banks are offering for deposits, and this has been coming off for a while now.
Stanchart with deposits from customers amounting to $510,4 million only paid $154,800 in interest expense. We might as well say the bank is not paying interest on deposits.
Paying off corporate debt, too, could be a smart way to deploy excess cash. But Econet dealt with that early this year when it conducted a $130 million rights issue which again pointed to the cash challenges the country is currently facing. Mergers and acquisitions could have been compelling alternatives to buying back stock, but it’s not like Econet has not been spending. The company has invested heavily in new products and innovation, albeit with the challenges of bringing in the necessary equipment as mentioned above.