Top Glove’s share buybacks

TOP Glove Corp Bhd’s aggressive share buybacks over the last few months is surely one for Malaysia’s corporate history books. Since September, the world’s largest medical glove maker has spent close to Rm1.14bil to buy back its own shares from the market, indulging in the exercise almost everyday in the last two weeks.

True, share buybacks are a perfectly legal way of rewarding shareholders. They are described as a way to return capital to shareholders. Even Apple and Berkshire Hathaway continue to aggressively buy back their shares. Companies with excess cash have other options though – return cash directly to shareholders in the form of cash dividends or reinvest the money into the business or even acquire a new business.

Top Glove must be convinced that the best way to spend that Rm1bil or so is to buy back its stock and not, say, pay out its cash in dividends. The stock only enjoys a dividend yield of under 2%. But despite the aggressive buybacks, the stock is down 16% this month, losing over Rm10bil in its market capitalisation. Hence, one wonder what Top Glove’s share price would be if not for the buy backs?

So what comes next? Top Glove will have to account for these big buyback spend come its financial close. Accounting standards will require the company to mark to market the stock it is holding in its treasury following the buybacks. If the cost of that holding is lower than the market price of Top Glove’s shares at the accounting cut-off date, then the company would have to account for this, taking a hit to its profits.

And if the overall profit number does come in lower due to, say, reduced average selling prices of rubber gloves, then the hit to the bottom line could be significant.