What is Normal-Course Issuer Bid?

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A normal-course issuer bid is a Canadian term for a public company's repurchase of its own stock in order to cancel it. A company is allowed to repurchase between 5% and 10% of its shares depending on how the transaction is conducted.The issuer repurchases the shares gradually over a period of time, such as one year. This repurchasing strategy allows the company to buy only when its stock is favorably priced.

Definition

A Normal Course Issuer Bid (NCIB) refers to the process by which a Canadian publicly listed company repurchases its own shares for the purpose of cancellation. Depending on the transaction method, a company can repurchase 5% to 10% of its shares.

Origin

The NCIB originated as a strategy for companies to enhance earnings per share and shareholder value by reducing the number of shares outstanding. This practice became popular in the late 20th century, particularly in North American markets.

Categories and Features

NCIBs are typically categorized into open market repurchases and privately negotiated repurchases. Open market repurchases involve the company buying its shares on the open market, while privately negotiated repurchases involve agreements with specific shareholders. The advantage of open market repurchases is their flexibility and market price transparency, whereas privately negotiated repurchases can be completed more quickly.

Case Studies

A typical example is the Royal Bank of Canada (RBC), which has implemented NCIBs multiple times over the past few years to optimize its capital structure and enhance shareholder returns. Another example is the Canadian National Railway Company (CN), which has reduced its outstanding shares through repurchase programs, thereby increasing earnings per share.

Common Issues

Investors might encounter issues such as whether the repurchase will strain the company's cash flow and whether the repurchase genuinely enhances shareholder value. Typically, repurchase programs should be conducted when the company is in a strong financial position to avoid negative impacts on operations.

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