Can SoftBank’s buyback program help retain its investors?

Last week Japanese technology investor, SoftBank Group Corp. announced its biggest ever share repurchase program with plans to spend as much as $5.5 billion in its own stock in 2019. Out of an upper limit of 112 million shares or 10.3% of the total, this repurchase is enough to buy 71 million shares or 6.5% of the total.

But is this repurchase program a good idea?

Generally, it is considered that buybacks are an indication of a strong financial position of the company, although it shrinks the public float of the company. In this case, a reduced public float is likely to reduce SoftBank’s weight in benchmark indexes. This is reason enough to cause passive investors, who track those gauges, to cut their holdings. In fact, current sentiment shift towards buybacks, amongst institutional investors, sees them as inferior to special dividends.

Amidst a rising trend of passive investing over the last three years, Japanese ETFs received more than $140 billion of net inflows -- out of which billions might have or will flow into SoftBank, a member of both the Nikkei 225 Index and the Topix.

Since SoftBank’s investors mainly consist of asset managers and government entities, keeping a large public float is how to keep the investors attracted. Dividends, and not buybacks, are the main channel through which shareholders are rewarded. SoftBank currently has a 5.4 percent weighting in the Nikkei 225 because of its relatively high price stock price (about 10,000 yen compared with, say, less than 5,000 yen for Sony Corp. or 570 for Mitsubishi UFJ Financial Group Inc.). But SoftBank accounts for only 1.9 % of the Topix.