Article Review and Stock Buyback

Introduction

Most business always prefer raising their equity by selling their total or part of shares to the investors. Stock sharing is normally done in two ways namely, giving the money in terms of shares or through stock buyback. Stock sharing or purchase is very important in a business in that it reduces tax rate and changing the capital structure of a company or business firm. Royal Dutch Shell is one such company that rely on stock buyback to raise its equity.

In the article “Royal Dutch Shell Finally Delivers Big Stock Buyback, But Shares Break Support,” Narayanan compare the stock exchange of four major companies namely the Royal Dutch Shell, Chevron, Exxon Mobile Inc. and Conoco Phillips Corporation. The stock exchange of the above companies ranges from cash flow, and revenue to RDSA. The RDSA stock rate shows a decrease in the debt ratio and capitalization from 25.8% in the first half of 2017 to 23.6% in the last quarter of 2018. The Royal Dutch Shell is currently using stock buyback to reduce their debt ratios. Despite great fall in share price, the Conoco Philips Corporation seemed to have been gaining more shares (Narayanan, 2018).

Benefits of Stable Dividend Policies

Dividend policy serves a vital role in stock purchase as it ensures that investors buy purchase stock depending on the number of shares they invested. Stable dividend policies protect the interest of their investors by regulating the policy changes while guaranteeing a sense of sustainability to their investors. Also, it enables the investors to estimate the future value of their shares. The future value of shares or dividend can be calculated using the formula below.

Future Expected Dividend = [[(Expected Dividend) + [(Expected Increase) *(Expected Payout Ratio) *(Adjustment)]]

Other dividend policies include residual and constants which enable the company to pay its dividend annually or through funds left after deducting the capital expenditure.

How Financial Metrics Affect Stock Purchase

Just like stable dividend policy, stock purchase highlights several reasons that allow the individual shareholders to purchase stock by complying with specific code of standards. Buyback for instance allows the company to repurchase all of its shares or just a section of it. By repurchasing the company stock or shares, the company is able to reduce the cost of capital thus benefit from stock valuation. Also, it enables the company to consolidate its ownership while inflating the financial metrics to get more profits for paying its bonuses (Narayanan, 2018).

Besides, repurchases is another way of retaining money in a business. By increasing the stock options and altering the composition of payouts. Also, by reducing dividends sharing, the company is bale to increase the size of its stock. In other words, a company with a good buyback strategy is more stable than the other without good buyback strategy. The RDSA had a decline in terms of buyback between 2017 and 2018. The low RDSA could have possibly be caused by undervaluation. Undervaluation of company stock determines the market position of a company behind its competitors. Therefore, a company with low valuation is less competitive while the other with high valuation is more competitive since it has a lot of stock (Sakinc, 2017). This implies that individual metrics directly affect the number of stocks purchased by shareholders and the way company rivals react to the stock purchase plan.

Conclusion

Companies adopt buyback or repurchase program for various reasons. This programs are planned to benefit the stock sellers and the buyers. A company that uses a well-timed repurchase is likely to reduce the turmoil in the stock price while declining the industry rivals. This benefits both the company and the shareholders.

Reference

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

Sakinc, M. E. (2017). Share repurchases in Europe: a value extraction analysis. The Academic-Industry Research Network Working Paper, 16(2017), 1-27.