Share repurchase and dividend payout behaviour: The South African experience

Abstract

Share repurchases, rather than dividend payments, are increasingly becoming the globally favoured payout method. This has prompted a renewed interest in the field, and raises questions about the actual motivation for share repurchases and whether companies are now repurchasing shares in preference to investing in future growth. This study set out to ascertain whether South African company payout behaviour mirrors global company behaviour. Comprehensive data on share repurchases are, however, not compiled by South African financial data sources or by the Johannesburg Stock Exchange Ltd. In preparation for this study, the authors thus compiled the first comprehensive share repurchase database for companies in selected JSE-listed sectors for the first 11 years (i.e. 1999 to 2009) since share repurchases were first allowed in this country.Share repurchases were found to be a popular payout method, especially in the more recent periods covered in the study. Payout value was dominated by a few companies paying dividends every year and regularly repurchasing shares. Aspects unique to the South African regulatory environment, however, resulted in the South African share repurchase experience not fully mirroring current global practice. The main constraint in the South African share repurchase environment is that comprehensive, actual-time-based share repurchase data are not available. Recommendations are made on how to align the South African regulatory environment with global best practice. Regulatory changes, as well as continued research in the field, will equip stakeholders to make informed decisions.

Market reaction to tender and private offers on the JSE

“…When comparing the three specific share repurchase types in South Africa (namely the pro rata offer, and the two private offers), it was found that, for reporting periods from 1999 to 2009, the repurchase by the holding company of the shares held by subsidiaries was the favoured specific share repurchase type (representing about 55% of total specific repurchase value), while pro rata offers and other specific offers represented about 32% and 13% of the total specific repurchase value, respectively (Wesson et al, 2015). The fact that subsidiaries are allowed to repurchase shares in their holding company has therefore affected share repurchase behaviour in the South African regulatory environment: the open market share repurchase type is not the favoured share repurchase type, and the repurchase by the holding company of shares held by subsidiaries represents about 31% of total share repurchase value -hence resulting in specific repurchases being the favoured share repurchase method (Wesson et al, 2015).…”

“…The fact that subsidiaries are allowed to repurchase shares in their holding company has therefore affected share repurchase behaviour in the South African regulatory environment: the open market share repurchase type is not the favoured share repurchase type, and the repurchase by the holding company of shares held by subsidiaries represents about 31% of total share repurchase value -hence resulting in specific repurchases being the favoured share repurchase method (Wesson et al, 2015).…”

“…The rand amounts of the repurchases were obtained from the annual report disclosures (especially the directors' reports, statements of changes in equity, and share capital notes) and/or SENS announcements. The methodology applied in the Wesson et al (2015) study was also applied in this study to obtain share repurchase data from annual reports.…”

“…South African share repurchase activity has not yet reached the levels of US share repurchases, but a strong increase in share repurchase activity since 2005 has been observed (Wesson, Bruwer, & Hamman, 2015). The unique South African regulatory environment has, however, resulted in the open market share repurchase type not being the favoured approach for companies listed on the Johannesburg Stock Exchange Ltd (JSE).…”

“…The unique South African regulatory environment has, however, resulted in the open market share repurchase type not being the favoured approach for companies listed on the Johannesburg Stock Exchange Ltd (JSE). Only about 43% of South African share repurchase value is executed through the open market and, owing to the 3% announcement rule of the JSE Listings Requirements, only about 59% of the open market share repurchase value is announced via the Security Exchange News Service (SENS) (Wesson et al, 2015). South African studies on the market reaction to open market share repurchase announcements by JSE-listed companies found support for the information-signalling theory (Bhana, 2007;Pienaar & Krige, 2012;Wesson, Muller, & Ward, 2014).…”