The Game-Changing Impact of Dangote Cement Plc’s Share Buyback

Dangote Cement Plc made an announcement to the Nigeria Exchange Limited regarding the initiation of its Tranche 1 Shares Buy-Back Programme on July 7, 2023.

The program involves the purchase of 168,735,593 fully paid ordinary shares, which represents 1% of the total current issued shares.

The buy-back program will commence on July 17, 2023, and will be completed within two days or until the entire tranche size has been acquired. The shares will be purchased from the open market at the NGX. These repurchased shares will be held as treasury shares, in compliance with CAMA regulations.

The execution of Tranche 1 is not expected to have a significant impact on the company’s financial position. Shareholders of Dangote Cement who wish to participate in Tranche 1 are advised to seek guidance from their stockbrokers or registered capital market operators authorized by the SEC for assistance in submitting trades on the NGX’s trading platform.

In response to the recent disclosure of Dangote Cement Plc.’s Tranche 1 Shares Buy-Back Programme, investors have raised inquiries about its potential influence on the company’s market price and performance.

As a result, this report aims to provide an insightful exploration of share buy-back programs and their consequential effects on investor benefits and the company’s overall performance.

Recall that the Securities and Exchange Commission (SEC) had approved the establishment of a new share buy-back Programme for Dangote Cement Plc.

According to the corporate disclosure, the Programme will expire on 12 December 2023, 12 months from the date of the shareholders’ resolution. The share buyback Programme will be executed under the approval granted by the company’s shareholders at an extraordinary general meeting held on 13 December 2022.

Dangote Cement Plc ran its most recent share buyback Programme (Tranche 1) in January 2022 where the company repurchased a total of 170,003,074 fully paid-up ordinary shares of 50 Kobo each, representing 1% of the currently issued shares.

The Programme lasted for two trading days, commencing on 19th January 2022, and was completed on 20th January 2022.

KEY HIGHLIGHT:

• Dangote Cement Plc.’s decision to initiate a share buy-back program comes as a strategic move to address its heavy leverage and uplift investor sentiment.
• A share repurchase reduces the total assets of the business so that its return on assets, return on equity, and other metrics improve when compared to not repurchasing shares.
• Reducing the number of shares means earnings per share (EPS) can grow more quickly as revenue and cash flow increase.
• One of the reasons for the share buyback is to increase long-term shareholder value. Also, the exercise is expected to support the cement manufacturer’s continuous capital structure and balance sheet optimization 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.
• Dangote Cement’s share price has risen 16.4 per cent to N285 since the company completed its first share repurchase on 31 December, 2020, hitting a high of N300 on 16 May, 2022 and a new high of N360.70 on 11 July, 2023 after the announcement of the Third Share Buy-Back Programme in three years.

SHARE BUY-BACK

A share buyback program, also known as a stock repurchase program, is a strategy employed by a company to repurchase its own shares from the open market or directly from shareholders.

This process involves the company using its available cash or borrowing funds to buy back outstanding shares.

The purpose of a share buyback program can vary depending on the company’s objectives. Here are some common reasons why companies may initiate share buybacks:

1. Enhancing Shareholder Value by reducing the number of outstanding shares, a share buyback program can increase the ownership percentage and earnings per share (EPS) for existing shareholders. This can potentially lead to an increase in the company’s stock price and overall shareholder value.
2. Capital Allocation Share buybacks provide an alternative to distributing excess capital to shareholders instead of paying dividends. It allows the company to return cash to shareholders without incurring immediate tax liabilities for investors, as the repurchased shares can be sold at a later time when desired.
3. Signal of Undervaluation When a company announces a share buyback program, it can be interpreted as a signal that the company’s management believes the stock is undervalued. This can instill confidence in the market and attract investors who perceive the buyback as a positive indicator of the company’s prospects.
4. Dilution Mitigation Share buybacks can offset the dilution caused by the issuance of additional shares for employee stock option plans or convertible securities. By repurchasing shares, the company can reduce the dilutive effect and protect the proportional ownership interests of existing shareholders.
5. Excess Cash Utilization Companies with significant cash reserves may initiate share buybacks as a means to utilize excess cash efficiently. If the company has limited investment opportunities or believes that its own shares are a better investment than other available options, a buyback program can be a way to deploy the excess funds.

ADVANTAGES OF A SHARE BUY-BACK PROGRAMME:

a) Enhanced Shareholder Value: By repurchasing its own shares, a company can reduce the number of outstanding shares in the market. This reduction in the supply of shares can increase the earnings per share (EPS) and potentially boost the company’s stock price, thereby benefiting shareholders.

b) Efficient Capital Allocation: Share buy-backs can be a strategic way for a company to utilize excess cash or surplus funds. Rather than sitting on idle cash or making risky investments, a buy-back program allows the company to deploy capital efficiently by investing in its own undervalued shares.

c) Signal of Confidence: A share buy-back program can be seen as a positive signal to investors, indicating that the company believes its shares are undervalued. This can instill confidence in the market, attracting new investors and potentially improving the company’s reputation.

d) Flexibility in Capital Structure: By repurchasing shares, a company can adjust its capital structure, leading to a more favorable debt-to-equity ratio. This can enhance financial stability, increase borrowing capacity, and potentially improve credit ratings.

DISADVANTAGES OF A SHARE BUY-BACK PROGRAMME:

a) Misallocation of Resources: If a company spends a significant amount of its capital on share buybacks, it may divert funds away from other areas that require investment, such as research and development, new projects, or acquisitions. This could hinder long-term growth prospects.

b) Overvaluation Risk: If a company repurchases its shares at inflated prices, it may lead to an overvaluation of the stock. This could result in future difficulties if the stock price declines, potentially causing losses for shareholders.

c) Opportunity Cost: Funds utilized for share buy-backs could have been allocated to dividend payments, reinvesting in the business, or pursuing strategic initiatives. Shareholders who rely on dividends as a source of income may prefer consistent dividend distributions instead of buy-backs.

d) Market Perception: Depending on the market’s interpretation, a large share buy-back program could be viewed negatively as an indication that the company lacks growth opportunities or is uncertain about its future prospects. This perception may erode investor confidence.

CONCLUSION – OUR TAKE ON THE MATTER

In conclusion, the announcement of Dangote Cement Plc’s share buy-back program positions the company favorably, generating positive expectations among investors.

This development is expected to have a constructive impact on the company’s market performance, with potential positive reactions in the equities market both in the upcoming trading session and leading up to the specified buy-back date.

Historical Data Reveals Investor Delight: Dangote’s Share Buy-Backs Trigger Positive Market Response

The story of Dangote’s Share Buy-Back Programmes unfolds with remarkable market responses. In the first announcement back in December 2020, the stock price soared by an impressive 16.95%, reaching N245.

The second announcement witnessed another surge, propelling the market price by 6.18% to N275. However, the most recent revelation on July 7, 2023, led to an astonishing jump to N300.10, showcasing a remarkable 3.48% surge.

Not stopping there, the stock broke new ground, hitting a remarkable 52-week high of N360.70 on July 11, 2023, marking an exceptional 24.38% increase from its starting point of N290 on July 6, 2023.

We expect a further upsurge in market price of Dangote Cement on or after the completion date of the share repurchase Programme.

The tale of Dangote’s share buy-back impact is one of rising prices and newfound highs, illuminating the fervor and optimism embraced by investors.

These substantial price escalations signify the market’s unwavering enthusiasm and confidence in Dangote Cement Plc.’s strategic moves, as each share buy-back announcement kindles a surge in market performance, pushing the boundaries of new peaks.

Investing in Dangote Cement Plc following the share buy-back news holds several advantages. Here are additional reasons why it is a good opportunity for investors:

1. a) Value Enhancement: The share buy-back program indicates that the company perceives its shares as undervalued. This belief can instill confidence among investors, as it suggests that Dangote Cement Plc is committed to enhancing shareholder value.
2. b) Potential Price Appreciation: By reducing the supply of outstanding shares in the market, the buyback program can create a favorable supply-demand dynamic. This reduction, combined with positive market sentiment, may lead to an increase in the company’s stock price, offering the potential for price appreciation.
3. c) Efficient Capital Deployment: With surplus funds allocated towards repurchasing shares, Dangote Cement Plc demonstrates efficient capital allocation. By investing in its own undervalued shares, the company utilizes its resources optimally, which can generate long-term benefits for shareholders.
4. d) Enhanced Financial Position: The buy-back program allows Dangote Cement Plc to adjust its capital structure and potentially improve its debt-to-equity ratio. This can strengthen the company’s financial position, enhance stability, and potentially improve credit ratings, which can be appealing to investors.
5. e) Confidence in Future Prospects: The share buy-back program serves as a positive signal, indicating that Dangote Cement Plc is confident in its future prospects. This confidence can be infectious among investors, attracting new interest and potentially bolstering the company’s reputation.

Considering these factors, investing in Dangote Cement Plc following the share buy-back news presents an opportunity for investors to benefit from potential value appreciation, efficient capital deployment, and improved market sentiment surrounding the company’s performance.