Dangote Cement Plc will hold an Extraordinary General Meeting (EGM) on January 22nd, 2020, to deliberate on a long list of company issues, specifically plans by the company to buy back up to 10% of its issued share capital.
Stock buybacks refer to the repurchasing of shares of stock by the company that issued them. A buyback occurs when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors.
Here are reasons Dangote Cement is buying back shares
- To increase long term shareholder value – Considering the review of the company’s share price and prevailing equity market conditions, the board of Dangote Cement believes that at the current market valuation values, the initiative is considered as one of the appropriate capital allocation decisions to improve long term shareholder value.
- Tool for managing capital structure, balance sheet efficiency – The exercise is expected to support the cement manufacturer’s continuous capital structure and balance sheet optimisation process. This means that repurchasing shares while improving financing and balance sheets efficiency is expected to reduce the cost of capital and enhance investors’ value.
- Return cash to shareholders – While some investors prefer cash distributions, others would choose to stay invested in a company. To cater to both, Dangote Cement decided to use a combination of dividends distribution and share buybacks to strike the right balance.
- The initiative would help reduce the number of shares outstanding and increases the proportional rights of any single share. This means that the earnings per share (EPS) would be higher due to the share buy back and shareholders that want to remain invested in the company in the long term would benefit from this.
During the EGM, which will hold at Eko Hotels and Suites in Victoria Island, Lagos, the company’s board will also be seeking approval to pursue all necessary means towards ensuring the actualisation of this plan.
Meanwhile, corporate finance historians in Nigeria will agree that, if approved by the shareholders on January 22, 2020, this may be the first time a Nigerian corporate body is going to undertake a share buyback as a corporate action.
The reason this looks like a first is that until now, Nigerian corporate law and governance had frowned at share buybacks. The reason is that those who crafted the corporate law in Nigeria had felt that such corporate actions could be abused.
Be that as it may, if Dangote Cement goes through with its share buyback proposal, it will not only be a welcome development but will open the doors to other corporate entities that may wish to use share buyback as an instrument of corporate financial management.