The influences of share buyback schemes on earnings per share and profitability of listed companies in South Africa

M.B.A.A share buyback scheme is a situation where a company buys back its shares from shareholders and then cancels them or creates treasury shares. The Companies Act, 1973 (Act 61 of 1973), previously limited the reduction in the number of shares to preference shares which could only be redeemed by a transfer of the equal amount to the capital redemption reserve fund, a non-distributable reserve in order to maintain the capital levels. Section 85 of the Companies Act now allows a company to buy back its ordinary shares and cancel them without replacing them with a capital redemption reserve fund. The only requirement is that the company must prove that they will be liquid and solvent after undertaking such a share buyback. This has far-reaching consequences for the creditors who rely on the capital maintenance rule as the only protection afforded to them should the company go bankrupt. The reduction in the number of shares after the share buyback also creates problems. Firstly, the company's operating capabilities can be reduced, damaging the remaining and future shareholders and secondly, the company's earnings per share (EPS) can improve without any improvement in the actual performance. This tends to make the Annual Financial Statements (AFS) unreliable as the users still rely on the EPS for an indication of whether the company is growing or not. Companies use a share buyback for various other reasons, the most important of which being that they want to distribute excess cash back to shareholders. Some of these companies, however, go back to the lending houses to borrow money to finance their current operations immediately after the share buyback. It is imperative to investigate the real reason why companies undertake a share buyback and what effect this has on the profitability and the earnings per share of listed companies in South Africa