Thursday, September 9, 2010

If I am a CEO, will I do share buybacks?

If I am a CEO, will I do share buybacks?

Let me warm up the topic by quoting Warren Buffett, in 1999, he said this:

‘Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason, to pump up or support the stock price. The shareholder who chooses to sell today, of course, is benefited by any buyer, whatever his origin or motives. But the continuing shareholder is penalised by repurchases above intrinsic value. Buying dollar bills for $1.10 is not good business for those who stick around.’

I believe we got to stick to one principle, buying dollar bills for $ 0.50. If we are really convinced that the company is undervalued substantially, do it in a big way. Never take a quarter of viagra tablet and mixed it with 1 litter of honey.

Let me show you a table of how YTL who has been doing share buybacks regularly.

A few observations:

1. They bought back very little when the overall market was depressed in 2009. They tend to get excited during the bull run - 2007?

2. For whatever reasons, the number of outstanding shares did not reduce over a period of time, why? ESOS, warrant conversion, right issues, etc? I just have no idea. Why buy back when they need money to fund expansion?

3. Why buy back when they have lots of debts on theirs balance sheet, though they also have almost same about of cash? Won't be it good if they pare down debts?

4. They would have returned almost $ 1.2/share as cash dividend. If they want shareholder to make money from share dividend, then they must distribute when market is hot or else capital gain by disposing it at open market will be limited. It is almost acting like fund manager function but do they have the time or skill?

So to answer the question. If I am a CEO I will buy back shares if my company has:-

1. A plenty of cash. No debts.

2. No strategic acquisitions to make. I would prefer to use cash to buy competitions to grow stronger and bigger rather than returning cash.

3. Diluting returns if I continue to expand my business(if I have more than 60-70% market share).

4. Don't do stupid things by diversifying into much lower return businesses.

5. When the whole market is really depressed. I am acting as a money manager for shareholders when they are too afraid to invest. I will make more money for shareholders by buying low - selling high(give them as dividend shares in 2007?). August 1998, 2001, March 2009 would be ideal entry points.

Disclaimer: I am not a CEO but would be happy to be hired. :-

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