Buying treasury stocks? Not a big help

Thursday, May 8, 200
Several months ago, a series of listed companies announced a plan to buy their treasury stocks in an attempt to stimulate the demand and restore investors’ confidence. However, it seems that the action has not helped much in rescuing the falling stock market.

Making announcements to reassure investors

Previously, the stock market once saw share prices down in three months in 2007. At that time, the State Securities Commission sat together with the market’s members discussing the solutions to rescue the market. They agreed that listed companies would buy treasury stocks to restore investors’ confidence.

And the solution proved to be very effective. Right after listed companies announced the plans to buy treasury stocks, the share prices immediately stopped decreasing and began recovering.

The same remedy has been used to treat the stock market, which has been sliding for the last few months. However, unlike the previous year, the remedy proves to be unsuccessful. The share prices keep decreasing despite the efforts by listed companies.

The State Securities Commission (SSC), when turning the green light on listed companies buying treasury stocks, has promised to create favorable conditions for the companies to do that.

For example, SSC considers the purchase of treasury stocks as the action to rescue the stock market, not a normal behavior, so it gives preferences to the companies.

Vu Bang, Chairman of SSC said that strict regulations are set up for the purchase of treasury stocks and the listed companies which purchase treasury stocks. For example, the companies will only be able to increase capital six months after they buy treasury stocks.

However, as considering this the action to serve the common interests, not private interests, the Prime Minister has allowed them to ignore the regulations.

According to the HCM City Stock Exchange, 23 listed companies announced a purchase of treasury stocks in the first quarter of 2008. The companies registered to buy 8,552,770 shares, while no company announced that it was selling stocks. Some more listed companies also registered to buy treasury stocks in April, 2008.

However, it is quite a surprise that some companies registered to buy 50,000 shares only (HAS, DXP). It seems that the companies buy stocks just ‘for fun’. The companies began buying stocks since early April, but the purchase had not been completed by May 5, 2008.

Some companies registered to buy millions of shares (SSI, STB, VIC, DPM), but they are the minority.

However, to date, the treasury stock purchases still cannot help prevent stock prices from sliding. It seems that the purchases can bring the only effect of reassuring investors, while they cannot bring the desired effect of stopping the price decreases.

The director of a securities company, which has been authorized to buy treasury stocks for a listed company, said that the everyday trading volume of treasury stocks proves to be very ‘modest’, which cannot help stop the price decreases. In fact, the small purchases mean nothing if compared to the huge supply of stocks.

SSI, for example, registered to buy 3mil stocks commencing from April 16, and it had purchased 970,000 stocks by May 5. As such, SSI purchases 80,000 stocks only for every trading session, a very small figure if compared to the average trading volume of 750,000 shares per trading session in the last 15 sessions.

Do treasury stock purchases help?

Securities companies frankly said that one should not think that the purchases will help the stock prices recover. With a very big volume of shares in circulation, no fund is considered big enough to buy all the stocks to turn round the situation.

However, the action of purchasing treasury stocks can bring certain effects, especially, it can help reassure investors. More treasury stocks mean fewer stocks in circulation, which also means less pressure to pay dividends to boards of directors. Once the volume of stocks in circulation decreases, the EPS would be higher, thus making enterprises more valuable.

Treasury stocks can serve as the place to reserve capital, and when necessary, enterprises can sell the stocks to get capital for investments. Besides, enterprises can hope to get profit in case the share prices increase. (Lao dong)