Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A)
No. of Recommendations: 12
From today's Financial Times;
Buffett-backed Mitsubishi’s shares surge to record high on ‘monster buyback’
David Keohane in Tokyo
Mitsubishi’s shares surged to a record high on Wednesday after the Warren Buffett-backed trading house announced a “monster buyback”.
The Japanese company said on Tuesday that it would buy back up to ¥500bn ($3.4bn) in stock, sending shares up 10 per cent by lunchtime in Tokyo.
Calling it a “monster buyback” that “market participants were not expecting”, Jefferies analyst Thanh Ha Pham added that the company “has another ¥500bn excess cash that it could return to shareholders”.
The surge in the share price will be a boon for Buffett, who has ratcheted up his bet on Japan’s five biggest trading houses, the century-old commodity specialists increasingly operating as global venture capital and private equity businesses.
No. of Recommendations: 18
An interesting observation: buybacks don't change the value of a continuing share at all, unless done at a price well below fair value. Which is pretty rare.
(and it takes a large number of shares at a big discount to fair value to make much measurable difference)
So...if the stock price jumps on the announcement (just a hair under 10% today), the new people buying fall into the two general categories:
* Those who incorrectly think the average buyback increases the value of a stock.
* Those who think the buybacks will be done at prices materially below fair value, pretty much meaning they believed the shares were undervalued before the announcement.
Both categories could be called foolish. The first group are simply wrong, and the second group should have been buying those shares already!
They had the money, and they had an opinion about what a share was worth enough to conclude it was undervalued.
Jim
No. of Recommendations: 1
An interesting observation: buybacks don't change the value of a continuing share at all, unless done at a price well below fair value.
However, perhaps there is a justification to viewing an investment in these shares more favourably as a result of this announcement.
You have mentioned many times how Japanese companies have a tendency to do very poorly on capital allocation - i.e. hoard cash rather than put it to work. A clear indication of better capital allocation surely deserves a more favourable assessment of value .....
StevnFool
No. of Recommendations: 10
However, perhaps there is a justification to viewing an investment in these shares more favourably as a result of this announcement.
You have mentioned many times how Japanese companies have a tendency to do very poorly on capital allocation - i.e. hoard cash rather than put it to work. A clear indication of better capital allocation surely deserves a more favourable assessment of value .....
Makes some sense.
There is a hierarchy of intelligence of capital allocation, varying from company to company, and sometimes requiring some difficult assessments on the part of management.
As you note, these buybacks, probably not done at an outrageous valuation level, are probably better than holding billions of yen in a bank account as some firms do.
When screening for international firms I always require a good dividend.
Among other things, this often helps you pick securities where your interests align with those of a controlling shareholder, perhaps more important than the dividend itself.
Back to how to distribute excess cash: arguably the most rational choice would be wildly unpopular.
When the stock price is really cheap, cut the dividend and do buybacks. When it gets expensive, quite the buybacks and go back to dividends.
Jim
