If directors are acting prudently, it comes down to where the best investment is.
If the company is substantially undervalued, then purchasing shares has all these benefits:
- improves liquidity in the short term (while the buyback is running)
- improves shareholder value through improving market demand
- reduces the free float, reducing future supply and improving the yield (return per share)
- offers a superior investment return to other potential opportunities, with less risk
In a mature market, or an overvalued one, there may not be other opportunities that are as beneficial to pursue. Spending on a takeover just because you have cash can be a great way of wasting money. And similarly holding on to it for some years instead of effectively providing a more immediate return to shareholders is more detrimental to the company's owners, being shareholders.
Of course, it can also be done for the wrong reasons, or by bad management, or with poor foresight.
SIP Price at posting:
87.5¢ Sentiment: Hold Disclosure: Not Held