The repurchase of shares is one of the ways that companies have to pay shareholders. It consists of buying a package of its own shares, normally on the open market, and amortizing them (eliminating them) with the aim of raising the price of the remaining ones.
BBVA has announced the sale of its subsidiary in the United States to the PNC financial company for $11.6 billion in cash (€9.billion at an exchange rate of 1.2 dollars per euro), a very attractive price that represents 19.7 times the unit's 2019 earnings. The transaction will have a positive impact on BBVA's fully loaded CET1 ratio of c.300 basis points, equivalent to €8.5 billion of CET1 generation. When the transaction closes, the bank will have about 600 basis points in excess of the capital requirement, the highest in Europe. There are multiple options for using that excess capital; the objective in any case is to create value for the shareholder. An attractive option at current prices is a relevant share buyback.¹
What does a share buyback entail?
The repurchase of shares or share buyback is the action by which a company buys its own shares and amortizes or eliminates them. As there are fewer shares of the company in circulation, the participation of each shareholder in it increases.
For example, if a company has 100 shares outstanding and a shareholder has 20 shares, his or her stake in it is 20 percent (20/100 = 20%). If the company buys 20 shares and redeems them, 80 shares will remain outstanding. The shareholder's participation will become 25 percent of the company (20/80 = 25%).
What advantages does it have for the shareholder?
The main advantage it has is that it raises the share price. With fewer shares, if the company is worth the same, each share will be more expensive. For example, if a company has a market value of €10,000 and has 100 shares outstanding, each share will have a price of €100. If 20 shares are repurchased and redeemed, 80 shares will remain with a price of €125 each, 25 percent more expensive.
In addition, the share buyback leads to an increase in earnings per share (EPS).
For example, if a company has a profit of €1,000 and 100 shares are issued, the EPS will be €10 euros (1,000 euros / 100 shares). If the company repurchases 20 shares and redeems them, the EPS increases to €12.5 euros (1,000 euros / 80 shares). In other words, the shareholder has the right to a greater participation in the profits of the company, which is a stimulus for the share price, if the prospects for future profit are positive.
What is its tax implication?
One of the advantages of the share buyback is that it has no tax implications for the shareholder, unless they choose to sell the shares, in which case they will be taxed if they obtain a capital gain between the purchase and sale of the securities. It is a comparative advantage with the dividend, which is taxed as income from savings in IRPF.
Another difference between both remunerations is that while the dividend constitutes a distribution of past profits, a share buyback is materialized through the rise in the stock market in anticipation of future profits.
Why is it an attractive option for BBVA at current prices?
Currently, BBVA's book value per share is €6.5 (in other words, the value of equity per share). For its part, BBVA's share is trading at levels close to €4, which implies that the institution's stock market value is lower than its book value. Therefore, any buyback of shares that occurs at a price lower than this book value represents a contribution of value to the shareholder: an asset is being bought at a price lower than what it is worth on the balance sheet.
How long does it take to complete a share buyback transaction?
The extent of share buyback programs depend on the amount of shares that can be purchased, that is, the size of the program. As a general criterion, they can be extended up to a year or more, in order to gain greater flexibility and adjust to existing regulations.
¹Any potential repurchase would never occur before the closing of the transaction, estimated in mid-2021. Any repurchase proposal: (i) would take into consideration the share prices, among other factors, and (ii) would require approval by the Shareholders and the Supervisor.
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