Definition
A Normal-Course Issuer Bid (NCIB) is a strategy used by publicly traded companies to purchase their own shares from the open market. The aim is to reduce the number of outstanding shares, potentially increasing per-share financial metrics like earnings per share (EPS) and thus boosting the market value. The NCIB must adhere to rules set forth by the appropriate national securities exchange, limiting the amount of shares that can be bought within a specific period.
Phonetic
Normal-Course Issuer Bid (NCIB) can be phonetically pronounced as “nor-muhl-kors ish-oo-er bid”. These are the phonetic pronunciations of each word:- Normal: “nor-muhl”- Course: “kors”- Issuer: “ish-oo-er”- Bid: “bid”
Key Takeaways
- An NCIB (Normal-Course Issuer Bid) is a market repurchase program that allows a public company to purchase an allocated number of its shares from the open market. This is usually done to increase the company’s share price by reducing the number of outstanding shares.
- NCIBs can demonstrate to investors that the company believes its stock is undervalued. It can signal confidence in the company’s future performances, hence potentially leading to an increase in shareholder value and investor confidence.
- Furthermore, regulatory bodies play a significant role in NCIBs. Companies must follow the rules and regulations provided by these bodies, and these programs must be approved before implementation. They often have constraints pertaining to the maximum number of shares that can be purchased and the timing of these purchases.
Importance
The Normal-Course Issuer Bid (NCIB) is a pivotal financial term as it signifies a commitment by a company to buy back its own shares from the open market. This move is often a demonstration of the company’s belief that its shares are undervalued and present an attractive investment. An NCIB also provides the company with a mechanism to return surplus cash to shareholders, which could enhance shareholder value. Furthermore, by reducing the number of shares outstanding, an NCIB can help increase a company’s earnings per share (EPS), which can also lead to an increase in the share price. Thus, an NCIB is an important tool in the financial strategy of a company as it can play a significant role in capital management and improving shareholder returns.
Explanation
Normal-Course Issuer Bid (NCIB) is a method used by companies to reduce the number of shares available in the open market, consequently increasing the earnings per share and ensuring capital allocation efficiency. The purpose of NCIB is to allow companies to purchase their own outstanding shares directly from the market over a specific time frame with the intention of canceling them. This decreases the total number of outstanding shares, which may increase share value and provides the potential for enhanced returns to shareholders. The primary benefit of using an NCIB is its ability to provide companies with a strategic avenue for maximizing shareholder value. On the other hand, the use of NCIB also serves as a signal to investors regarding the company’s confidence in its own intrinsic value. If a company is purchasing back its own shares, it sends a message that the company believes its stock is undervalued and a good purchase. This may boost investor confidence and potentially lead to an increase in share price.
Examples
1. Canadian Pacific Railway Ltd. (CP) – In 2016, this company announced its intention for an NCIB for up to 665,000 common shares. The NCIB was a part of CP’s strategic initiatives to further enhance long-term value for shareholders. 2. Enghouse Systems Limited – In 2020, Enghouse announced an NCIB to buy upto 3,189,803 of its common shares (representing about 10% of its public float). The company aimed to use this bid as a part of an overall strategy to increase shareholder value.3. American Express Company – In 2017, American Express Company announced plans for an NCIB under which the company would be allowed to buy back up to 150 million shares of its common stock over a period of time. The board of directors of the company approved this initiative. These are all examples of how companies have made use of Normal-Course Issuer Bids to buy back shares from their shareholders thereby aiming to enhance shareholder value or sometimes used in conjunction with capital management strategies.
Frequently Asked Questions(FAQ)
What is Normal-Course Issuer Bid (NCIB)?
Normal-Course Issuer Bid or NCIB is a Canadian term for a company’s strategy to repurchase its own shares from the open market to reduce the number of outstanding shares.
Why would a company initiate an NCIB?
Companies primarily enact a NCIB when they believe that their shares are undervalued in the market. By repurchasing their own shares, they can effectively ‘buy low’ and reduce overall share count. This action usually increases shareholder value.
How does an NCIB affect shareholders?
An NCIB can positively affect shareholders as the less shares there are in the market, the more each existing share is worth. It also demonstrates that the company has enough cash on hand for repurchases, indicating financial stability.
Can a company repurchase all of its shares through an NCIB?
No, there are restrictions on the amount of shares a company can repurchase through an NCIB. In Canada, the limit is usually up to 10% of the public float.
Does an NCIB affect a company’s balance sheet?
Yes. When a company buys back its own shares, it reduces its cash assets and its shareholders’ equity. This can impact the company’s balance sheet.
How long does an NCIB last?
The timeframe for a NCIB varies, but is typically one year. Once approved by the regulatory body, the company can then repurchase its shares anytime within this period.
What is the process to initiate a NCIB?
A company intending to initiate a NCIB must first notify their respective securities commission or exchange, detail their intention and get approval, which usually takes around 10-15 days. After approval, the company can start buying back shares.
Can a company cancel an NCIB?
Yes, companies can cancel a NCIB at any time without purchasing any of their outstanding shares. However, they are required to maintain appropriate disclosure about their intentions and progress.
Related Finance Terms
- Share Buyback
- Market Repurchase
- Securities Regulation
- Stock Liquidity
- Capital Allocation Strategy
