Wednesday, February 07, 2007

BHP's $10 billion share buyback - A good move?

Reading that BHP plans to spend an additional $10 billion, bringing the total to $13 billion, buying back its shares stopped me in my tracks.

Due to the record commodity prices, BHP has been making record profits, $6.2 billion in the last six months of 2006.

A share buyback will not add to shareholder value. Indeed, if I was a shareholder, I'd be taking that extra 5% and selling out, at least that was my gut reaction to the news.

So, lets have a look at BHP.
Market cap - $131 billion
Shares - 2,982 million
P/E - 12.8
EPS - 3.45
Price - $44.03

The EPS works out to a healthy 7.8%. But the earnings are only healthy on the surface. They are based on record prices for aluminum, alumina, copper, iron magnesium and molybdenum. Record prices means the share is at record levels, indeed, just 4 years ago the share price was around $10.

A number of commodity prices have declined. EPS can be expected to decline by 20, 30, 40%. Buying back shares will make it so that there are less shares to average the earnings over, but there will also be less assets being held, less cash. Commodity prices have declined enough, the eps will still decline despite having up to 10% fewer shares to average the earnings over.

The commodity market is cyclic, and buying back your shares when they are premium prices simply rewards those who sell. It does not give share holder value to those who hold. The smart money buys low and sells high. BHP is high.

Just 4 years ago the share price was about $10. How much real value has been added in the way of new properties, new resource, new mines, etc.? I am not sure, but the current price is more than 5 times the book price, and 3.9 times the sales.

The ideal time to buy back shares is when they are priced low, then share holders that stay are rewarded.

Alternatively, because the market is so cyclic, put the cash away for days when commodities aren't priced so well. That's when there'll be a fire sale on many asset rich properties, and that's when to buy them.

Indeed, a bet plan would be to wait for the next bear market and line the company with asset rich properties from the fire sale.

BHP reports record profits; pledges $10B buyback

By MarketWatch
Last Update: 2:40 AM ET Feb 7, 2007

HONG KONG (Menafn - MarketWatch) -- BHP Billiton Ltd., the world's largest mining company, announced a surprise $10 billion share buyback Wednesday, sending its Australian-listed shares up more than 5%.

The larger-than-expected share buyback comes amid record commodity prices last year.

BHP BHP reported net profit rose 41% to $6.2 billion for the six month period ending in December, up from $4.36 billion in the year-ago period, bolstered by strong production results for most mineral commodities, the company reported in a statement published on its Web-site Wednesday.

The result is the seventh straight half-year record profit for the miner.

BHP said it will add $10 billion to its previously announced $3 billion share repurchase plan. The equity purchases will take place over the next 18 months and include off-market purchase s as well as open market purchases, the company said.

Analysts said the interim profit was in line with expectations but the size of the share buyback was a surprise to the market.

Shares of BHP rose 5.85% to close A$28.24 ($21.97) on the Australian Stock Exchange Wednesday.

BHP declared an interim dividend of 20 U.S. cents per share, an increase of 14% over the last year's interim dividend.

The miner said it has set aside $17.5 billion for 29 projects across the globe.

BHP said it has repurchased $1.7 billion of stock at an average price of $18.23 since announcing its earlier buy back plan in August last year. Including Wednesday $10 billion pledge, BHP has returned $17 billion to shareholders since August 2004 the company said.

The Anglo-Australian mining group also said 49-year-old chairman Charles Goodyear plans to retire in 2007.

BHP said it saw half-year production records for aluminum, alumina, copper cathode, iron ore, magnesium ore and molybdenum.

Shares of BHP are traded in Sydney and London.

6 comments:

actualstuff said...

While share buybacks are preferable to dilution, I've always also seen them as a declaration of "we don't really have any way to make our investors a gain with this money" by the management.

I think you're right. Socking it away for acquisitions in the future would be far more prudent.

Or an increased dividend. While that is similar to the share buyback, it actually rewards the holder with profit rather than rewards the seller when there is buying at a high price.

Great post.

Deborah said...

Yes, a dividend would reward equally. I guess the amount they are spending on buying back shares is about $4-5/share.

Carsten said...

Hi,

probably you are right but what
can they do if a large holder indicates he wants to get out.
Certainly that would depress
prices if they do not buy back
and certainly scaring the share holders that hold on.

Of course this is still nothing
to be exited about for the stocks prospects.

The real question remains what will
happen to the commodity prices. And right at the moment sentiment is not very optimistic, but we could be close to the bottom for example in copper.

Still there are probably better plays out there.

Good work

Deborah said...

You bring up some good questions and certainly I had not thought about large shareholders going directly to the company about reducing their position.

Richard said...

Very interesting post, and comments. If the company's propping up its share price to plug the gap left by shareholders bailing out it's a short-term game it's playing and of little benefit to long-term holders. Are there any at this stage of the game?

Deborah said...

I just came across an article on share buybacks, http://www.cfo.com/article.cfm/8099425/c_8102077?f=insidecfo.

It points out the degree of conflict of interest in doing buybacks over dividend, and the dramatic increase in buybacks over dividends.