dwot (99.88)

Three Cheers for the Buybacks

January 27, 2008 – Comments (5) | RELATED TICKERS: BHP , PKW

I think buyback are bad for stay and hold investors and reward those who sell the stock. 

One of the first analysis that I did on a buyback was on BHP and BHP climbed considerably since I wrote my analysis just under a year ago.  I understand commodity stocks fairly well and I don't like BHP.  It was at $44 when I wrote the above blog and it climbed to $87.43, a double and certainly had the appearance of making me look dead wrong.  It has since retracted to today's $63.42, but I seriously doubt that retraction is over.

Just having a quick peek entirely wasting my morning, according to Google finance, BHP had a diluted weighted average of  6.04 billion shares for the 2002 annual report and for the 2007 annual report they had 5.87 billion shares, a reduction of a mere 2.9% over 5 years.  The news releases indicated the share buybacks are far in excess of what Google finance is show the share reduction to be.  The 2004 buyback alone was 2.9% of the issued share capital of the BHP Billiton Group (4.8% of BHP Billiton Limited).

I have just spent 2-3 hours looking at BHP and the reporting is not transparent in terms of trying to figure out exactly what is happening with the share count.  They have separate "rah-rah-rah" reporting of "look how many shares we bought back," but I did not find an over all accounting of the changes in share capital over the years.  They also have the director's enumeration not added up and presented as an absolute nightmare in terms of trying to determine exactly what's happening there.  I also found employee shareholder plans, which is another nightmare to determine what is happening with share count.  Just how many shares and how much of the profit is actually going to directors and employees is extremely well hidden with the buyback and disgraceful accounting of share capital.

What the diluted share count does show is 170 million fewer shares over 5 years.  The 2007 report says 288 million shares bought back.  Other news from them:

May 06 - BHP Billiton today announced that it has successfully completed the US$2 billion capital management programme announced in February 2006, buying back a total of 114.82 million shares, or 1.9% of the issued share capital of the BHP Billiton Group. 

Nov 04 - BHP Billiton announced today that it has successfully completed the first phase of its US$2 billion capital management programme through an off-market share buy-back of 180.72 million BHP Billiton Limited shares. Due to strong demand, the total amount of capital repurchased by BHP Billiton under the buy-back was increased to A$2.272 billion (US$1.780 billion), representing 2.9% of the issued share capital of the BHP Billiton Group (4.8% of BHP Billiton Limited).

I just found a better summary, 530 million shares repurchased since 2004 yet only 211 million cancelled and 25.5 million in treasury...

Where are those 319 million shares?  At today's prices that's $10 billion of market cap...  

I digress yet again. 

Anyway, because of this kind of stuff that I see all over the market I truly believe that when the dust settles the buy and hold investors are going to be in for a real hit to the value of their equities when it is found the profits have been squandered and the eps really isn't reflecting that promise simply because the reduction in shares tends to be a misnomer.  And to track this longer term I set up a portfolio of 5% or greater buy back equities, all with underperform under a new handle, dwotBuyback. 

I suppose as I have time I will sort through and see if I can figure out which have greater levels of debt for these buybacks and how much the over all decline in equities really is relative to the actual buy back program.