NATIONAL Foods will next month seek shareholders' consent to buy back a maximum of 10 percent of the company's shares when the company convenes its annual general meeting. Natfoods seeks shareholders' approval to buy back its own shares in terms of Section 79 of the Companies Act (Chapter 24:03) and Zimbabwe Stock Exchange listing requirements.
The agro-foods processor said such approval would expire on the date of the firm's next annual general meeting in November next year.
Directors, if granted the permission, would determine the terms and conditions upon which the shares in question may be bought back.
"Acquisitions shall be of the ordinary shares, which in aggregate in any one financial year, shall not exceed 10 percent of . . . issued ordinary share capital as at the date of this resolution," said Natfoods.
The listed firm said the maximum price at which the shares would be bought shall be the weighted average of the market price at which the ordinary shares trade on the Zimbabwe Stock Exchange five days immediately preceding the day of purchase of such shares.
Natfoods would notify shareholders when it has bought shares exceeding 3 percent of the number of shares in issue prior to acquisition.
There are various reasons and theories behind the companies' action, the most common being to raise the value of the share when management feels the share is undervalued.
Reducing the number of shares may help raise the share value as it reduces supply and increases demand for a particular company's stock.
Companies making profits, typically, have two uses for those profits. Part of the profits can be distributed to shareholders in the form of dividends or stock repurchases. Companies can also reinvest most of their retained earnings profitably, but may find that some or all of their retained earnings cannot be reinvested to produce acceptable returns.
Share repurchases are an alternative to dividends.
When a company repurchases its own shares, it reduces the number of shares held by the public. The reduction of the float, or publicly traded shares, means that even if profits remain the same, the earnings per share would increase due to fewer share in issue.
Normally, investors have more adverse reaction in dividend cut than postponing or even abandoning the share buyback programme.
So, rather than pay out larger dividends during periods of excess profitability reducing them during leaner times, companies prefer to pay out a conservative portion of their earnings, perhaps half, with the aim of maintaining an acceptable level of dividend cover.
Another reason why company executives, in particular, may prefer share buybacks is that executive compensation is often tied to the executives' ability to meet earnings (profits) per share targets.
In companies where there are few opportunities for organic growth, share repurchases may represent one of the limited options of improving earnings per share in order to meet the firm's set targets.