Recently I received an offer from CBA about their share buyback program. They are offering to buy back shares with the total value up to $6 billions. And I am curious of how it affects my existing holding. I took a bit of researching and come up with a guess on how the share price will change.
The share price may drop slightly (4.44%) due to the difference of share outstanding and shareholder equity, before and after the event. The drop is too small to do anything meaningful and fit my investment strategy.
What is share buy back?
A company can offer investors to buy back shares from their portfolio. This reduces the floating shares on market, and decreasing the market capitalization as the result.
In the case of CBA, they offer to buy back shares from investors with a certain discounted price, as specified in the booklet. I am sure there are cases where people need to relinquish the share that they are holding, but it is not easy to dump a few hundred millions worth of share into the public market. Therefore these share buy back may be a great way to get rid of the shares without people knowing.
- The Price/Book ratio is unchanged.
- CBA successfully buys back the maximum amount of shares that worth $6 billions.
- CBA buy back price is the market price at the time this blog is written.
First, let us see what are the current figures of CBA. For the calculation, I need to find the following details.
- Current share price;
- Current share outstanding;
- Current market capitalization; and
- Current Book value, or Price/book ratio
Luckily, we can easily find all these information in Yahoo Finance.
At the time of writing, the information is as follows.
Note that the green values are the manual input value, while the other fields are calculated from the green field.
Next, I attempt to calculate the new share price, by following this logic.
- After share buy back, the outstanding share will be $6 billions worth of share less.
- CBA will spend $6 billions from its pocket to buy back these shares, which means the shareholder equity will decrease by $6 billions.
- The new book value per share will be recalculated by dividing the new shareholder equity by the new share outstanding.
- Recalculate the new share value by multiply the book value by the price/book ratio.
The result will look like this.
As we can see the expected share price is smaller than the current share price. However it is a very small amount. And therefore it is meaningless for me to do anything about it.
Off market share buy back is a good way to release capital from CBA shares. However since I don’t like selling shares, especially shares of a seemingly stable company like CBA, I will not participate in this buy back opportunity. And based on the above calculation, I feel that there is no use in doing anything related to the price drop estimations.
I will keep an eye out for the price. The buy back date is 04 October, so I expect the share price to be adjusted to the price above within days of 04 October.
Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it. – Peter Lynch
By Tuan Nguyen