With the recent downturn of the local stock markets, we have seen many companies come out with disclosures regarding the approval of a stock buyback program by their respective board of directors. Many firms disclosed their stock buyback programs months ago and we have seen some companies that have been actively buying back their shares of stock from the local market.

There are currently 2 types of share buybacks happening in the PSEi:

1.) The company buys back stock from the market and records it as treasury shares.

This is the most common type of buyback. The company's free cash is used to buyback stock to reduce the outstanding number of shares and lists them as treasury shares under the equity subsection. The total outstanding shares of the company will be reduced.

2.) a fully owned subsidiary buys back stock from the market and records it as shares owned by a subsidiary.

This is a creative type of buyback being done by a few companies in the PSE (ANS, ICT, LR). This is similar to the above transaction except when it comes to recording the outstanding number of shares. The outstanding number of shares are NOT reduced because these shares are not held as treasury shares.

Normally to the common investor, any news of a share buyback program is treated as good news which should push the price of the stock up due to the increased value of the shares held by investors. Though this might be true for some, it isn't true for all companies. Not all buybacks are good for the shareholder. The basic principle of the share buyback is to buy stock from the market if there is a large discrepancy between value and price. Some buybacks are actually just meant to prop up the share price and have nothing to do with the shares being undervalued (but of course these companies will always claim that their shares are being undervalued by the market). The reason for this is that there are lots of companies with ESOP (executive stock option program) programs that pay their top executives stock as a bonus or incentive. The executives therefore would like to keep the stock price higher so that they can get more "bang for the buck" so to speak.

As with all investments, entry price is very important and will usually determine if the investment will be fruitful or not. This applies to stock buyback programs and is very important. If the company implementing the buyback pays too high a price for their own shares, the shareholders will suffer in the end.