This Blue Chip Stock Has Been Buying Back Its Own Shares

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, also 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 one that has been engaged in buybacks these past few weeks.

The company in question is Oversea-Chinese Banking Corp Limited  (SGX: O39), the longest established bank in Singapore. Formed in 1932, OCBC has operations in over 18 countries and territories, predominantly in Asia.

OCBC has been busy with share buybacks in the month of June. As of today, the bank has bought shares of itself on 11 different occasions, spending a total of nearly S$19 million on 2.2 million shares.

The bank’s latest financial results were for its fiscal first-quarter, the three months ended 31 March 2016. The bank saw its revenue (total income) dip by 2% year-on-year to S$2.06 billion, but its net profit actually declined by a sharper 14% to S$856 million. The good thing is that the bank’s net asset value per share – a proxy for its economic worth – had climbed by 5.1% to S$8.20.

Looking ahead, OCBC’s chief executive Samuel Tsien commented in the earnings release that the “near term economic visibility continues to be low” and that the bank “will remain focused on conservative growth in [its] core businesses and markets.”

OCBC’s shares closed at a price of S$8.58 yesterday. At that price, the bank is valued at slightly over 1 times its book value. It’s worth noting that the bank’s average price-to-book value over the last five years is 1.3.

A Foolish conclusion

Companies that are engaged in share buybacks are just a good starting point for investors looking for opportunities. It’s up to the individual investor to dig further and determine for him or herself whether a company’s shares are actually cheap or not.

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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 owns shares in Oversea-Chinese Banking Corp.