We more often see the company’s posting about share repurchase lately. However, fewer companies retired the treasury shares in the past. How much companies cancel the shares? The following table shows that comparison of about the data of 1,800 Japanese companies between March 2018 and January 2020.
For the period from March 2018 to January 2020, Equity Cancellation score gained 0.43 from 2.32 to 2.75. A company that has higher score of Equity Cancellation criteria has retired the stocks. This is really good sign as an increasing number of companies cancelled the shares from March 2018 to January 2020. Meantime, Cash Holding score inched up 0.02 from 1.02 to 1.04 for the same period. According to the 2 scores above, companies retired shares (resulting from share repurchase) more frequently but the cash on hand decreased slightly. The result shows that cash was piled up in the B/S faster than cash used. As for the Dividend Policy score in the table above, dividend policy score rose 0.35 from 2.28 to 2.63. Companies raised dividends payout from the earnings for the same period. Companies would allocate cash flows to share buyback and dividend, while cash on hand remained nearly same cash/total assets level.
The average ROE (actual) and ROA (actual) of the universe companies are added in the table. ROE will be generally pulled higher when a company retires the shares from the shareholders’ equity under the given condition. Average ROE (actual) fell 1.2 ppt from 8.3% to 7.1%, when Equity Cancellation score advanced for the same period. At the same time, ROA (actual) also slid 0.5 ppt from 4.2% to 3.7%. Of course, the numerator (net profit) would increase or decrease in the economic condition for the period and it can’t be stated unconditionally that the profit margin or return fell for the period. However, we wonder if capital allocation policy would have any impact on ROE or ROA. More precisely, we wonder if companies would have allocated cash to shareholder return more than CapEx for future growth. The point is that it’s more serious if an increasing number of companies can’t look for the opportunities for future growth and resulted in paying for dividends and cancelling equities.
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Aki Matsumoto, CFA