Charlie Munger, Vice Chairman of American conglomerate Berkshire Hathaway, once offered value investor Mohnish Pabrai three rules that could improve an investor?s results greatly. Among them, was the rule to pay close attention to the cannibals ? companies that are buying back their own stock hand over fist.
The idea is simple. If companies are buying back their own stock and reducing the outstanding share count substantially, existing shareholders? stake in the business becomes more valuable. A company earning $10m with 1m shares will earn $10 per share. If the…
Charlie Munger, Vice Chairman of American conglomerate Berkshire Hathaway, once offered value investor Mohnish Pabrai three rules that could improve an investor’s results greatly. Among them, was the rule to pay close attention to the cannibals – companies that are buying back their own stock hand over fist.
The idea is simple. If companies are buying back their own stock and reducing the outstanding share count substantially, existing shareholders’ stake in the business becomes more valuable. A company earning $10m with 1m shares will earn $10 per share. If the share count’s reduced to 0.8m, each share will be entitled to $12.50 worth of profit, enhancing the value of the existing shares.
But, not every company that does share buybacks benefits its shareholders. Companies that buy back shares when it is expensive is doing a poor job at capital allocation, and doing shareholders a disservice. There are also companies that buy back shares just to offset shareholder dilution stemming from the issuance of share grants, options etc. which should generally be frowned upon. That said, shareholders can be rewarded if the company does it right.
It will take a long time before we see a local company spend US$107b on share buybacks to retire one third of its shares over the past 10 years like what American technology company IBM did. Especially after considering how telecommunications provider SingTel (SGX: Z74) is Singapore’s largest listed company with a market cap of ‘only’ S$58.8b. But, here are three companies that have been doing consistent share buybacks since the start of the year till 23 April 2012.
|Company||Amount Spent on Buybacks||Number of Shares Repurchased||Average Price Per Share|
|Overseas-Chinese Banking Corporation (SGX: O39)||$41.0m||3.94m||$10.40|
|SembCorp Industries (SGX: U96)||$16.3m||3.14m||$5.18|
|HupSteel (SGX: H73)||$140,060||629,000||$0.22|
First up, we have a local banking stalwart, OCBC. The bank has spent $41.0m buying back 3.94m shares at an average price of $10.40 per share this year. OCBC has a S$500m share buyback programme in place that started in July 2012. A total of $108.9m from the buyback programme has been used to purchase 11.3m shares. It is worth noting that despite the bank spending S$162m last year to repurchase 18.2m of its ordinary shares, its weighted average share count last year was still higher than 2011’s (3.441b shares vs. 3.386b shares).
Next up is utilities and marine engineering firm SembCorp Industries. It paid an average of $5.18 per share to repurchase 3.14m shares for a total of $16.3m. The company has a history of buying back shares, spending $99.8m from 2010 to 2012 to buy back shares. But, the share count for SembCorp Industries had climbed slightly from 1.780b at the end of 2009 to 1.786b by the end of last year.
Rounding up the trio’s the aptly named steel products manufacturer, HupSteel. The amount of money spent by the company on buybacks looks small when compared to the previous two. But, HupSteel’s been steadily reducing its share count each year since June 2008 – its share count has been reduced from 627.37m to 621.85m at the end of 2012.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing owns shares in Berkshire Hathaway.