Buy-back can be beneficial for IT companies. Click to know how!
After subdued performance in IT sector, the companies are trying to give healthier, stronger returns to retail shareholders by various means including buy-back and dividends. Recently, Cognizant announced buy-back worth USD 3.4 billion to its shareholders, which led to the spate of similar announcements by its peers like TCS & Infosys, and there is also a possibility that Wipro may do the same.
On February 16, the management of TCS told that it will put the proposal of buy-back of equity shares in front of its shareholders for approval. If the proposal is approved, it will go through its first buy-back after 2004. TCS is expected to issue 10 per cent buy-back but if it wants to issue more than that, it will have to take permission from shareholders. Infosys did buy-back last year of 2,500 crore, as per its dividend pay-out policy of 40-45 per cent, which may be maintained on annual basis as per the cash availability by Infosys management.
When the companies mature, they resort to grow their return on equity (ROE) through buy-back. With opportunities in IT space shrinking and global environment not looking lucrative for an investment opportunity, companies are now looking for other ways to incrementally add value to shareholders.
The ROE of TCS and Infosys was at 43 per cent and 25.63 per cent, respectively. However, through the constant buy-backs, Accenture has been able to lift its ROE to the levels of 61.72 per cent against 13 per cent on a rough estimate without buy-back. This move has helped to add incremental increase in the earnings per share (EPS) when net profit are growing in the range of 11 per cent.
Till December 2016, Infosys and TCS generated free cash flow of 2.60 billion and 1.255 billion, respectively. Accenture returns almost all its profits but other IT companies return only 50 per cent to 60 per cent, fearing that if they do not have cash, they might lose the opportunity of expansion. In spite of buy-backs, Accenture has been able to grow inorganically and fund its expansion plans.