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 criteria 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…
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 criteria 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 company, chosen at random, that has been engaged in buybacks these past few weeks.
The company in question is the blue chip, Sembcorp Industries Limited (SGX: U96).
As a brief background, Sembcorp Industries is a bona-fide conglomerate with its three main business segments, namely, Utilities, Marine, and Urban Development. The former two are by far the most important for Sembcorp Industries and it’s worth noting that the conglomerate’s Marine segment stems from its majority ownership of fellow blue chip, Sembcorp Marine Ltd (SGX: S51).
In the month of August thus far, Sembcorp Industries has bought back shares of itself on three occasions, namely, the 3rd, 11th, and 17th of the month. The company had spent over S$950,000 on 350,000 shares.
The first six months of 2016 were a tough time for Sembcorp Industries. The company saw its revenue fall by 21% to S$3.74 billion when compared to a year ago. The bottom-line was worse as net profit attributable to shareholders came crashing down by 47.1% to S$193.5 million.
Weakness at Sembcorp Marine – the result of the fall in oil prices seen over the last two years – had been a big contributor to Sembcorp Industries’ results. The Utilities segment also played a part, with a 31% decline in net profit in the period. The first-half of 2015 saw the segment benefit from the sale of an asset, but even excluding that, there would still have been a 7% decline in net profit.
Nevertheless, Sembcorp Industries’ management team is confident that the company will be able to pull itself out from the challenging conditions it is currently in. It commented in the earnings release:
“The current environment remains difficult. Sembcorp has over the years built a strong foundation with our strategic presence in key emerging markets and solid capabilities in the energy, water and marine and offshore sectors. Today, we are well-placed to navigate through the challenges ahead so as to create and deliver long-term value and growth.”
Sembcorp Industries’ shares closed last Friday’s trading session at a price of S$2.72. At that price, the company is valued at 14 times trailing earnings.
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 doesn’t own shares in any companies mentioned.