How many of you will be happy if
a stock you had invested in underperforms or declines, especially at a time
when the company is conducting share buyback which is actually seen as a
cushion for downside. We know the answer - NO One. Rather primary objective of
investing in such stocks is to generate better returns. However there is one
person who thinks differently and his views matter a lot when it comes to
investing in stock markets. We are talking about none other Than the God of
Stock Market-Warren Buffet.
In one letter to his shareholders
Buffet commented on irrational reaction of many investors to change in stock
prices during the buy back. He stated “When Berkshire buys stock in a company
that is repurchasing shares, we hope for two events: First, we have the normal
hope that earnings of the business will increase at a good clip for a long time
to come; and second, we also hope that the stock under performs in the market
for a long time as well”. Confused? However Buffet explains it in very simple
manner. According to him one should wish the stock price to languish during the
buyback period as it automatically results in higher stake.
For example if the company has 1
lakh outstanding shares and we hold 5000 shares in the company then our holding
in the company works out at 5 per cent. As the company carries out a buy back,
the number of outstanding shares will reduce. Suppose the company announces a
buy back amounting to Rs 10 lakh at a maximum price of Rs 150. If the stock
price remains at Rs 150, company can buy back only 6667 shares resulting in
93333 shares outstanding. As a result our stake of 5000 shares in the company
will increase to 5.36 per cent. However, if the stock price declines to Rs 100,
company can buy back 10,000 shares (Resulting into 90000 outstanding shares)
taking our stake to 5.56 per cent. With a primary idea that the company
performs well after the buyback and profitability increases, the higher stake
serves as a benefit.
So does it make sense to invest
in companies carrying out a buyback? If
we go by the primary logic of Buffet that earnings of the business will
increase at a good clip for a long time to come, it surely makes a good
opportunity for a longer period of time. However if someone is looking for
capital appreciation in short term, this may not be the right strategy.
Why are we discussing is ADF
Foods has informed BSE that the Board of Directors of the Company at its
meeting held on July 27, 2016 has approved a buyback of Equity Shares at a
price not exceeding Rs 125 per equity share of face value Rs. 10 each for an
aggregate amount not exceeding Rs 18 crore. In view of the same, the Board did
not declare interim dividend on the equity shares of the Company.
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