With stock prices below “fair” value, firms launched 53 buyback programs from January to August, compared to 35 last year

09/27/2024

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Publicly traded companies are capitalizing on a lackluster year in the capital markets by launching share buyback programs, seizing the opportunity to repurchase shares they believe are undervalued. From January to August, 53 buyback programs were announced, surpassing last year’s total of 35.

Some prominent examples include pulp producer Suzano, construction company Moura Dubeux, and logistics warehouse provider Log Commercial Properties, which have all initiated buyback operations since January. These buybacks range from 500,000 to 200 million shares, collectively amounting to 1.2 billion shares—50% more than in 2023.

The reasons behind these buybacks vary. Companies often cancel repurchased shares, which benefits shareholders by dividing capital among fewer outstanding shares. This move signals to the market that the company believes its stock is undervalued, potentially boosting its price. Additionally, repurchased shares can be allocated for executive and employee compensation programs.

Most companies fund these buybacks using their own cash reserves. In this model, they set a share repurchase limit for a specific period, hire brokers to place purchase orders based on market conditions, and settle the payment within days of the transaction.

However, some companies opt for a financial tool called a “total return swap.” This derivative contract allows a company to trade shares for credit at a future interest rate. In this arrangement, the company partners with a bank that agrees to purchase the shares in the market and charges interest for the service. These contracts typically last 12 to 18 months.

Companies and banks sometimes agree to periodically assess the stock’s performance on the exchange. If the stock price drops, the company compensates the bank for the difference. If the stock rises, the bank transfers the gains to the company minus the interest on the transaction. Additionally, any dividends paid during this period are passed from the bank to the company.

Eric Altafim, director of corporate products at Itaú, estimates that the number of these derivative deals could reach around 100 this year. “It’s become quite common for companies to enter into these contracts,” he notes. “Most prefer traditional buyback operations, but some use derivatives.”

According to his calculations, large-scale operations in this category are relatively few. “The volume tends to be smaller, likely in the dozens rather than hundreds,” he explains. “There are probably around ten larger-scale operations.”

For financial institutions, the benefit comes from the interest they receive on these transactions. One of the main advantages for companies is that they can execute buybacks without tapping into their cash reserves. They also gain the flexibility to trade shares without needing to adhere to a blackout period, such as when preparing to release earnings results.

Earlier this month, shopping center operator Iguatemi announced it was “nearing the end of the settlement period for the total return equity swap contracts” under its fourth buyback program, approved in March 2023, and had initiated its fifth program as approved by its board of directors.

According to the company’s statement, contracts for Iguatemi’s fifth buyback program could total up to R$120 million. When contacted, Iguatemi declined to provide further details beyond the information disclosed to the market.

Having just completed one share buyback program, Log Commercial Properties is now launching another. In its first program, announced on July 5, the company repurchased 10% of its 5.5 million shares on the market, investing R$240 million from its own cash reserves.

“We considered the ‘total return swap’ option but ultimately decided against it,” says André Vitória, Log’s chief investor relations officer. He explained that with a “comfortable cash position” of around R$900 million to R$1 billion, there was no need to employ a derivative instrument. “Every operation like this comes with a cost, and we preferred to use our cash rather than leave money on the table for the banks,” he added.

Marcelo Bacci, chairman of the board at the Brazilian Institute of Finance Executives (IBEF), explains, “The logic behind these operations is often driven by companies that don’t have cash on hand but see an opportunity to capitalize on the depreciated value of their shares, creating value for shareholders.” According to Mr. Bacci, using derivatives allows companies to preserve cash for other strategic purposes, such as investments or acquisitions.

At Suzano, where Marcelo Bacci serves as vice president of finance, investor relations, and legal, the company views share buybacks as “a good investment for the company’s resources.” “Our shares have been trading at the same level for two years,” Mr. Bacci explains.

Suzano launched a new buyback program on August 9, and on the same day, its shares rose 1.68% to R$54.50. Earlier this year, Suzano’s stock was priced at R$55.14, but it hit a low of R$46.64 on June 5, marking a 15% decline. Despite having a buyback program in place during this period, the stock has not fully recovered to its early 2024 levels. However, investment analysts still view the stock as undervalued, estimating its fair price within 12 months to be between R$70 and R$80.

Construction company Moura Dubeux, which focuses on middle- and high-income real estate in the Northeast and raised R$1 billion in its 2020 IPO, is also engaging in share buybacks. According to Diogo Barral, chief investor relations officer, the company is now in its third buyback program. It repurchased 10% of the available shares in its first round, followed by 5% in the second program. “Now, with the third program, we’re set to buy back 1% of the shares,” Mr. Barral says.

Of that 1%, 80% to 85% will be allocated to the company’s executive compensation program. The company has yet to decide the fate of shares from previous buybacks, which could either be canceled or used in future rewards programs. “Our shares are trading below their equity value,” Mr. Barral notes. Moura Dubeux is funding the buyback using its own cash reserves. “It’s worth it. Over the past two years, our stock has risen by 120% to 130%,” the executive adds.

*By Nelson Rocco, Rita Azevedo — São Paulo

Source: Valor International

https://valorinternational.globo.com/