On February 22nd Nintendo Co., Ltd. (TYO:7974) announced their intention to repurchase one million shares of stock over the next month.
Nintendo Stock Buyback
Nintendo announced in a board of directors meeting that they intended to repurchase one million of their own shares, which equated to just under 1% of their overall shares. Article 156 and 165 of the Japanese Companies act requires that the board first approves the purchase (which happened already), and they supply both the timeframe for the acquisition as well as limitations to the purchase. The board first must have a selling price determination which is the price the company is willing to pay for the stock then a period that they can acquire the stock. Nintendo elected to determine the price before March 7th, and to repurchase the shares before April 12th for the acquisition of the stock, Nintendo also listed limitations including market conditions for the repurchase. They will purchase the stock from the Tokyo Stock Exchange at the market rate depending on the day chosen for the buyback.
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In the same meeting Nintendo also announced they were cancelling ten million of their treasury shares before March 29th, these are shares of Nintendo owned by the corporation itself. Treasury shares are shares of Nintendo held by Nintendo; these are typically acquired through buybacks to cancel later or to release to the market to raise funds for the company.
Below is the current and proposed share structure of Nintendo:
Current Structure:
- Number of shares outstanding excluding treasury shares: 120,124,958
- Number of treasury shares: 21,544,042
- Total Number of Shares: 141,669,000
Proposed Structure (April 12th):
- Number of shares outstanding excluding treasury shares: 119,124,958
- Number of treasury shares: 12,544,042
- Total Number of Shares: 131,669,000
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Source(2)
Share buybacks are typically done when a company believes the stock is undervalued so that they can acquire their shares at a discount, then when the prices increases as anticipated either cancel the shares, so shareholders see an immediate return; or sell to the market at the new higher price with more cash for the company. In this scenario, the shares are being cancelled. Therefore the return will go directly to the shareholders.
Companies must disclose this information ahead to avoid insider trading within their own company and give the market a chance to adjust before the buyback. In Nintendo’s case, their stock has risen 4% on the news of the buyback, even though the actual buying of shares is less than 1%. Share repurchases have no effect on the market capitalization of the company, except the signal being sent as a result which could be interpreted two ways: Nintendo has nothing more valuable to invest their money in, or that Nintendo believes they are undervalued; and if Switch hardware and software sales are any indication they may be right.
