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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. 

5 Comments – Post Your Own

#1) On January 27, 2008 at 6:10 PM, camistocks (70.40) wrote:

I'm not sure if you are fighting windmills here. This discussion about options for employees and stock buybacks has already been led in the aftermath of the tech bubble! Stock and options are a normal part of the pay. It motivates employees to drive up the stock price, for example through good work!

A stock buyback is a tax efficient way to return capital to shareholders. It is the contrary of stock delution. It increases earnings per share. What's wrong about that!?

I think BHP buy and holders are quite happy, and will continue to be, IMO!

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#2) On January 27, 2008 at 6:28 PM, abitare (29.47) wrote:

There are some commodity bulls getting a beating lately. I closed most of my commodity picks to underperform consumer discretinary. The commodity trade is very crowded and the leveraged hedge funds will have to unload some winners to cover their losers.

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#3) On January 27, 2008 at 7:55 PM, dwot (28.81) wrote:

Here's a dumb one, not related to BHP...

January 18th, work stoppage did not affect operations, 

January 25th, 4th quarter earnings down 53% mainly due to a strike at one of its Mexican mines. 

So, which is it?  I tried to look up production results to see what I could determine as "truth" in how did production change and was it even close to a 53% decline?  Southern Copper's web site isn't working properly...

Actually, it would be interesting to be able to review the production versus earnings reports because metal prices are down and base metals are all taking a hit, a leveraged hit... 

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#4) On January 27, 2008 at 8:40 PM, camistocks (70.40) wrote:

abitarecatania: well, I guess I am one of those. And most commodity and also oil related stocks did take a beating, for the reasons you have mentioned. But IMO it's just temporary. China, India and the other developing countries will continue to grow and consume commodities, unless the central banks step on the breaks. Which they are not, as we know...

dwot, your first link talks about not affecting operations of Grupo Mexico, a majority shareholder of PCU. All commodities stocks are currently reporting reduced earnings. For whatever reasons. I believe, this will again change.

Look, PCU shareholders may be short term disappointed, but they know what a cash cow this is. Have you noticed copper prices rising recently again?

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#5) On January 28, 2008 at 2:06 AM, dwot (28.81) wrote:

Price are not as high as they appear if you correct for the devaluation of the USD.

Compared to this time last year if you correct for the declining currency copper would be priced at $2.84 to be "worth" the same relative to the USD.  Compared to Canadian it would be $2.64. Bingham should do well as it is US, but copper outside of the US is going to have much higher costs.

LME on copper is going down, but how does it keep going down when there is a housing slow down around the world? 

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