Stock Buyback or repurchase is the process of company repurchasing its shares from the shareholders.
So the question is- Why should a company go for buyback?
Who better to answer than Buffett himself?
" There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated."
Please note the AND condition and not OR i.e both reasons should occur together.
Let's try to apply the logic to a company which recently occupied (for a very short time) the No-1 position in stock market in terms of market cap.
Coal India- There is a buzz going around that Coal India will soon do a buyback.
Criteria A- Presence of Cash- It has more than 50,000 crores of cash. So cash is there for the buyback.
Criteria B- Undervalued?- A commodity player selling at a multiple of 18x on 2011 EPS and 15x on annualised 1H12 EPS is not dirt cheap. Please note the EPS number will reduce by 26% after the Mining Bill. With slowdown hanging over China, commodities and hence the stock can have a big correction (Ironically, drop in stock prices is called correction, but we still hate it!!!). So, stock does not look undervalued to me!
Why Buyback, then? Because the majority shareholder (GOI) is in need of money & he has no other alternate source.
As of now, Coal India's management is against the plan but looking at the way majority shareholder has handled ONGC and IOCL ( & other Oil Marketing Companies); Coal India may have to agree to the plan.
Precisely the reason why PSUs command lower multiples as compared to their private sector peers!
Was planning to give one more illogical example (according to me) of recently announced stock buyback. But Incentive Caused Bias asks me to stop writing anything.
Whose Bread I eat, his song I sing !!!
So the question is- Why should a company go for buyback?
Who better to answer than Buffett himself?
" There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated."
Please note the AND condition and not OR i.e both reasons should occur together.
Let's try to apply the logic to a company which recently occupied (for a very short time) the No-1 position in stock market in terms of market cap.
Coal India- There is a buzz going around that Coal India will soon do a buyback.
Criteria A- Presence of Cash- It has more than 50,000 crores of cash. So cash is there for the buyback.
Criteria B- Undervalued?- A commodity player selling at a multiple of 18x on 2011 EPS and 15x on annualised 1H12 EPS is not dirt cheap. Please note the EPS number will reduce by 26% after the Mining Bill. With slowdown hanging over China, commodities and hence the stock can have a big correction (Ironically, drop in stock prices is called correction, but we still hate it!!!). So, stock does not look undervalued to me!
Why Buyback, then? Because the majority shareholder (GOI) is in need of money & he has no other alternate source.
As of now, Coal India's management is against the plan but looking at the way majority shareholder has handled ONGC and IOCL ( & other Oil Marketing Companies); Coal India may have to agree to the plan.
Precisely the reason why PSUs command lower multiples as compared to their private sector peers!
Was planning to give one more illogical example (according to me) of recently announced stock buyback. But Incentive Caused Bias asks me to stop writing anything.
Whose Bread I eat, his song I sing !!!
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