Wednesday, December 7, 2022


Distributing Shareholder Wealth

Infy has announced a share buyback. If I hold Infy shares, should I take it?

It actually makes no difference to the individual shareholder like you and me, whether we take up the offer or not..

Very very theoretically, if I knew what Infy was worth, exactly, I should tender my offer for the buyback if the offer price is more than that intrinsic value and if I am sure the  market price is not going to reach there for some time.

Considering that it is impossible to know the intrinsic value of a share exactly and the fact that the share price fluctuates wildly anyway, that's not an easy call.

Then why does the Company announce a buyback?

It's a tax efficient way of distributing dividend, for the HNI shareholders of the company.

How is that the case?

Going back to the broad principles of dividend distribution, the company can distribute its surplus cash as dividends, or retain the earnings. If the company keeps on throwing up cash, like any software company does, and has no capital expenditure needs, then it cannot make use of the money internally. 

Acquisitions, or inorganic growth , is an option. But in many cases  that creates more problems than it solves. Acquiring for the sake of acquiring is not something the conservative Infy founders are likely to do.

Or , you need to be Reliance or Amazon. If it was an Ambani or a Bezos, they would invest that money in laying fibre optic cables across the country, or setting up data centres high up in the clouds. There is no end to the amount of cash that an Ambani can use for investing in infrastructure. Infy founders are not like that,  and in any case, if I were a shareholder of Infy, I would rather that they gave me my money, so that I can decide to invest it with a Bezos or an Ambani, or just use it to go on a holiday.

Great. The company thus decides to distribute the money. But this can become highly tax inefficient for the HNI shareholders. 

HNI's as a rule don't like "income" , they would prefer to earn all their money in the form of capital gains. 

Earning income is for idiots like us, the mango people, who keep slaving their butts off in order to pay the government. The rich always prefer capital gains.

World over, capital gains taxes are structured to be far far lower than income taxes. Capital gains taxes arise from holding assets. And who holds assets? The rich, of course. 

But how is this connected to dividend vs share buyback, you may ask. 

Well, when the company does a share buyback, it is using up its surplus money to buy its own shares and extinguish them. Assuming that the price for the buyback is fixed fairly, the pre buyback and post buyback value of the remaining  shares will be the same.

However, any future profits will have lesser claimants, since the shareholder base post buyback is lower. And that will increase the share value at a faster pace going forward.

So, if I hold Infy shares, should I offer them to the company for buyback?

It makes no difference, really.

No comments: