Is now the time to allow Nigerian companies buy back their shares?

About 4 – 5 years ago banks and indeed most stocks in Nigeria traded at about 25x their P.E ratios. Stocks were considered a “safe” bet for investing and “getting your money back”. That was in the glory days isn’t it? Today stocks are trading at single digit P.E ratios and some even lower than their PB ratios even after posting “impressive” results. Fact of the matter is that despite being cheap and obviously the best time to invest in the medium to long term investors are having none of it.

With the market tanking thus extinguishing any possibility of an the upside in capital gains people are more inclined to look out for dividends. However, this is respectfully considered still low, with the market averaging just 5-7% despite the relatively low trading market price. Can you blame them (us), these stocks were probably bought twice or thrice their current prices making the current yields all the more flattering. What then am I talking about?

One possible way to help the market is to introduce “Stock Buy Backs”. Stock Buy Back (or Share Repurchase) is a program that allows company’s to buy back its shares from the stock market. It even makes all the sense considering a lot of companies on the Nigerian Stock Exchange carry billions of outstanding shares in their books which only but drags down earnings per share as well as dividend per share. The banking sector for example has over 330b outstanding shares of 50kobo each and the Insurance Sector over 270b shares at an average of N5.6 and 50 kobo per share respectively. If the Insurance companies buy back half of their shares today this may just increase their value by a 100% to N1. With an option to buy back shares companies who are unable to guarantee growth or a considerable return on investment will have the option of using idle cash (provided they have it) to buy back some of these shares. This I believe will create the twin effect boosting market appetite and increasing earning per share of companies albeit in unorthodox ways. Nigerians law currently do not permit this that is why it is not practiced. In precarious time radical ideas can sometimes provide remarkable solutions.