Stock Repurchases
In the short article “Royal Dutch Shell Finally Delivers Big Stock Buyback, But Shares Break Support” by Aparna Narayanan (see below), stock repurchases may produce favorable effects on key financial ratios.
Narayanan, A. (2018, July 26). Royal Dutch Shell finally delivers big stock buyback, but shares break support. Investors Business Daily. Retrieved from https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=131003207&site=ehost-live&scope=site
After reading the article, write an essay that addresses the prompts below.
Include an introduction that summarizes the article.
Analyze the importance of stable dividend policies.
Determine reasons behind stock repurchases.
Analyze how individual financial metrics are specifically affected by stock repurchase plans and returns.
Your essay should be at least two pages in length, not counting the title and reference pages. You are required to cite and reference at least your textbook and the article. Use APA format to cite in-text and reference citations.

ANSWER

Stock Repurchases

The article under review is the “Royal Dutch Shell Finally Delivers Big Stock Buyback, But Shares Break Support,” authored by Aparna Narayanan and published in 2018. It summarizes the Royal Dutch oil company’s financial performance, including its massive stock buyback program worth $25 billion, second-quarter profit estimations, and stock price performance. In addition, the author compares these findings with other oil giants such as Exxon Mobil, Chevron, and ConocoPhillips. According to the article, due to recovery signals made and the company’s debt ratio vs. capitalization decline from 25.8% in the previous year’s second quarter to 23.6% in the first half of 2018, the RDSA company decided to start the stock buyback program. This buyback program would help in debt reduction, strengthen its balance sheet, and provide better oil price conditions. Besides, even though the share prices continued to tumble by 3.7%, it created a favorable situation for ConocoPhillips, providing a 0.4% gain (Narayanan, 2018).

Selling shares among investors is one way a company may use to raise money and maximize equities. Nevertheless, it may decide to repurchase these stocks based on different reasons such as reducing the effects of having many outstanding shares in the market to increase or consolidate ownership or if it believes that its shares are under valuated or wishes to improve and increase its financial ratios and change its capital structure (Punwasi & Brijlal, 2016). Referring to the RDSA company, its stock repurchase decision was based on helping in debt reduction. During a financial crisis such as increased debt or oil price conditions derived from severe and extended energy downturn such as in RDSA’s case, companies can decide to distribute wealth back to shareholders through stock repurchases, which has traditionally been attained through dividend payouts. However, currently, companies such as RDSA can use stock buybacks as it frees up profits and creates cash flow excesses that can be used to pay back shareholders. Large shares buyback programs such as the $25 billion in RDSA shows financial stability and health for the company, projecting that with the continued decline, their stocks would be undervalued, hence, announcing the repurchase program may spike stock prices in reaction, with the right timing (Hsu & Krause, 2016). Stocks operate on supply and demand; hence, a reduction in outstanding shares would precipitate price increment, and a company such as RDSA can raise its stock value by creating a supply shock once it repurchases the stocks.

The buying back of previously sold stocks to the public by a company means its shares outstanding number decreases, resulting in an impact on its earning per share (EPS), cash flow per share (CFPS), and financial ratios such as its ROA and ROE. Reducing the number of shares outstanding boosts the remaining owner’s shares and increases its earnings per share, thus improves overall corporate financial metrics. The EPS and CFPS increase due to decreased number of shares outstanding, potentially inflating stock prices, eventually creating shareholder value. Both ROA and ROE increase following a share buyback. Using cash to repurchase the stock reduces a company’s cash holdings, total assets, and shareholder equity in a company’s balance sheet.

In conclusion, companies are motivated by diverse reasons for developing and integrating a stock buyback program based on their condition, industrial trends, and preferred outcomes to benefit all involved parties’ needs. Overly, whenever stock repurchase programs are implemented, they substantially impact a company’s financial metrics, which can be positive or negative.

References

Hsu, C.-C., & Krause, A. (2016). The Optimal Timing of Open Market Stock Repurchases. Emerging Markets Finance and Trade, Vol 52(4), pp; 776-785. https://doi.org/10.1080/1540496X.2015.1117840.

Narayanan, A. (2018, July 26). Royal Dutch Shell Finally Delivers Big Stock Buyback, But Shares Break Support. Retrieved from https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=131003207&site=ehost-live&scope=site

Punwasi, K., & Brijlal, P. (2016). The market reactions to share repurchase announcements on the JSE: an event study. Investment Management and Financial Innovations, Vol 13(1-1), pp; 191-205. doi:10.21511/imfi.13(1-1).2016.06.