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What Is Singapore Airlines Ltd. Trying To Tell Us?

Singapore Airlines Ltd. (SGX: C6L) has recently formed an alliance with Air New Zealand. The partnership will allow both airlines to increase its destinations, and codeshare to over 40 destinations. Although this might be the latest news on Singapore Airlines, there is a more important news that was not well covered.

Singapore Airlines Ltd. has been aggressively buying back its shares in the past few months. The company has already repurchased about 3.6 million shares since it renewed the buy-back mandate at the end of July 2014. It currently has more than 28.7 million shares in its treasury, making it worth more than S$280 million.

What is the company trying to tell the market with its share buyback programme?

Huge Cash Pile

Although airlines businesses are infamous for being highly leveraged with heavy capital expenditures, Singapore Airlines has one of the best balance sheet in the industry. At the end of its latest financial year (as at 31st March 2014), the company is in a net cash position of S$4.1 billion. With such a high cash balance, the company issued a special dividend last financial year, more than doubling the dividend payout of the company. Even with this special dividend payout, the company still has enough cash in its net cash balance to continue paying out its regular dividends for more than a decade.

By using the cash to pay higher dividends and buying back shares, the company could be signalling to investors that:

1)      Management feels that the share price is cheap and worth to invest in

or

2)      There might not be many growth opportunities to invest in the business

The main reason for buying any share is when you feel it is a bargain, this is true even if you are a corporation buying your own shares.

On the other hand, the management has spent quite a significant sum of its cash balance to pay out special dividends and buying back shares. That might mean that management is finding it harder to find good growth opportunities for the company and thus distributing the cash back to its shareholders.

Foolish Summary

Business has not been great for Singapore Airlines. The profit margin of the company has been declining for years. Its return on equity is less than 4% for the past 3 years. Yet, Singapore Airlines Ltd. seems to be still buying back its share at the moment. Now the question is, management is buying, should we?

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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 Stanley Lim does not own any company mentioned above