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This Blue Chip Stock Has Been Buying Back Its Own Shares Lately

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 Singapore Airlines Ltd  (SGX: C6L), a blue chip stock in Singapore’s market by virtue of it being one of the 30 constituents of the Straits Times Index (SGX: ^STI).

Singapore Airlines probably needs no introduction for those who live in Singapore – it is the Garden City’s flagship carrier. But beyond flying passengers around in its full-service airlines, the company also ferries cargo around the world by air and owns low cost carriers such as Scoot and Tigerair. In addition, Singapore Airlines is the majority owner of SIA Engineering Company Ltd (SGX: S59), a provider of maintenance, repair, and overhaul (MRO) services to the airline industry.

Singapore Airlines has been buying back shares of itself on numerous occasions in the month of August. As of 29 August 2016, the company has bought back a total of 2.82 million shares for S$30.2 million.

In its latest earnings, for the first-quarter of its fiscal year ending 31 March 2017, Singapore Airlines saw its revenue slip by 2.1% year-on-year to S$3.65 billion. But, its profit attributable to shareholders managed to soar by 182% to S$256.6 million largely as a result of a one-time gain of S$178 million earned by SIA Engineering.

In the earnings release, Singapore Airlines commented on its outlook and it was not pretty. The airline said:

“The business outlook for the Parent Airline Company remains challenging amid economic weakness and geopolitical concerns in some markets. Competition remains intense with aggressive capacity injection, and yields will continue to remain under pressure. Yields will be further diluted if key revenue-generating currencies depreciate against the Singapore Dollar.”

Singapore Airlines’ shares closed yesterday’s trading session at a price of S$10.65 each. At that price, the company is valued at around 13 times trailing earnings. But, do keep in mind that Singapore Airlines’ trailing earnings contains the large one-off gain that was mentioned earlier.

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.