Blog 3: Ordinary shares

Company raises money through equity finance. Relatively, investors invest their saving to buy the ordinary shares of the firm to seek for return. Ordinary shares which represent the equity share capital of the firm. Therefore, after making profit, the company has the obligation to distribute dividends to those investors who buy the ordinary shares of their company. The remainder profit are kept inside the company and used for investing in the future of the company called stockholder’s equity. However, the retained earnings reinvested to the company may not always produce expectable returns. Therefore, there are another uses of retained earnings for company to avoid the accumulation of excessive amounts of cash in the corporation. It is share repurchase (share buyback).

The Anglo-Australian giant, BHP Billiton said it would be more than a double of its share buyback to $10billion that completed in 2011. The Chief Executive of BHP, Kloppers said that because they currently stand in the commodity price cycle, it  probably has increased price expectations for those assets, so they have clear opportunity to continue to invest money in their organic portfolio which is share repurchase.

Is that the only reason? From my point of view, it probably not.

Another reason would be BHP may reduce the number of share held by the public, so it reduces the float of shares. The profit remains the same and less ordinary share in the market. As the result, earning per share increase and result in a strong return on investment that stimulate the share price of BHP. In addition, BHP repurchase share used to signal of undervaluation. BHP shares last traded down 1.8 percent at AUS$46.50, lagging a 0.3 percent fall in the broader market. Repurchase share might undertake a fixed price tender offer show the premium is offered over current market price.

However, the BHP’s share price declined in Australian trading, Investors had high hopes for a big share buyback as the BHP is nearly debt free, its cash flow is booming and its failure to complete major takeovers limits its expansion options. It reflecting investors might disagree with BHP the use the cash flow for share buyback than expansion and hadn’t used it to fund a greater dividend for them.  

In conclusion, the aim of company to repurchase share is avoid the accumulation of excessive amounts of cash in the corporation that makes firm become a more attractive company that invested by the investor for raising money. But the company has to take care of the investor interest because investor is the most important person who ‘provides’ funds to the company. Otherwise, it would violate the aim from the beginning about joining the stock market.