Samsung bought back $2 billion of its own shares. Now it’s canceling them entirely.
Samsung just announced it’s going to cancel more than $2 billion of its stock. Meaning the electronics company bought back a bunch of its shares, and now it’s just going to make them disappear.
The upside of canceling shares is that it lets companies make their stock more valuable. But canceling shares can also be a bad sign, especially after a company hasn’t been performing well.
Usually, when companies buy back their own shares, they hang onto what they buy so they can give them to employees, or resell them later when they need a little money.
Connel Fullenkamp, an economics professor at Duke University, said canceling bought back shares is a bold statement.
“Traditionally, this has been a way for companies to try to signal to the markets, ‘Hey, we think our shares are undervalued,'” said Fullenkamp.
Canceling shares kind of solves that problem, said Ari Shwayder, who teaches economics at the University of Michigan’s business school.
“The overall value of Samsung is still what it was, but the number of shares that exist in the world is less, and so the value per share will go up if the number of shares goes down,” said Shwayder.
And investors have a reason to prefer share cancellations to, say, offering a dividend, said Paul Shea, who teaches economics at Bates College.
“You don’t pay a dividend tax rate on it,” said Shea. “You pay a capital gains tax rate, which is lower for most people.”
But, Shea said, the billions of dollars that Samsung spent to buy the shares it’s canceling is billions it did not spend on acquiring other companies or building new plants.
“So that could be a negative signal, but it could also just be that this is not a time where there’s great opportunity for expansion,” said Shea.
Shea said the cancellations would make him more nervous for a younger company that’s never turned a profit. With an older, more stable company like Samsung, he said there’s nothing wrong with returning money to shareholders this way.