Every now and then, I like to keep track of companies which have been buying back their own shares. That?s because share buybacks may be a sign that a company?s stock is undervalued.
Peter Lynch, the legendary manager of the U.S.-based Fidelity Magellan Fund, had included buybacks as one of the criterion in his investing checklist. To Lynch, it?s a good sign if a company or its insiders are buying shares.
Of course, management may be tasking the company to buy back shares for other reasons other than its stock being undervalued (some other reasons would be to offset dilution)….
Every now and then, I like to keep track of companies which have been buying back their own shares. That’s because share buybacks may be a sign that a company’s stock is undervalued.
Peter Lynch, the legendary manager of the U.S.-based Fidelity Magellan Fund, had included buybacks as one of the criterion in his investing checklist. To Lynch, it’s a good sign if a company or its insiders are buying shares.
Of course, management may be tasking the company to buy back shares for other reasons other than its stock being undervalued (some other reasons would be to offset dilution). And even if management feels that the stock’s undervalued, they may well be wrong in their assessment too. But, companies that have been buying back their own shares are still worth digging further into.
With these in mind, let’s take a look at two companies that have been engaged in buybacks these past few weeks:
1. Oversea-Chinese Banking Corp Limited (SGX: O39)
Formed in 1932, Oversea-Chinese Banking Corporation, or “OCBC” in short, is the longest established Singapore bank. The banking outfit has over 630 branches in 18 countries, predominantly in Asia. Last year, OCBC took a big step into Greater China through its US$5 billion acquisition of the Hong Kong-based Wing Hang Bank.
In April this year, OCBC got approval for a new share buyback mandate. Since then, the bank has been actively buying back its shares from the market with the last purchase, of 150,000 shares at S$9.02 each, happening on 12 November. As of that date, OCBC has already purchased a total of 4.97 million shares of itself.
OCBC last changed hands at S$8.92 last Friday and is valued at just 1.15 times its latest book value. Interestingly, OCBC’s price-to-book ratios for the most of 2015 so far have been near the lower end of its historical valuation ranges over the past five years.
2. Sembcorp Marine Ltd (SGX: S51)
SembCorp Marine, which provides integrated offshore and marine engineering solutions, is a prominent player in the offshore and marine industry. The company, majority-owned by conglomerate SembCorp Industries Limited (SGX: U96), provides the following services: repairing, upgrading and conversion of ships; specialised shipbuilding and; development of new yards and offshore platforms for the drilling and production of oil.
On 2 November 2015, Sembcorp Marine had bought 200,000 shares of itself from the open market at an average price of S$2.30 a pop. SembCorp Marine has a share buyback scheme which commenced on 17 April 2015; the firm has bought a total of 559,200 shares thus far under the scheme.
At its closing price of S$2.24 last Friday, Sembcorp Marine is valued at just 11 times its trailing earnings and offers an attractive dividend yield of 5.9% (based on its dividend of S$0.13 per share in 2014).
The difficulties in the oil & gas industry have affected the company’s results and this may have a chance of leading to the market’s pessimism overshooting the firm’s fundamentals.
A Fool’s take
All that being said, it’s worth pointing out that more work needs to be done beyond what I have shared before proper investing decisions can be made. There are still many important questions – regarding, say, the shares’ future prospects and financial strength – which are unanswered.
The two companies listed above might be buying back their own shares because their management team thinks their shares are cheap. It’s our job to figure out if the shares really are cheap.
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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 James Yeo doesn’t own shares in any companies mentioned.