RE: STOCK BUYBACKS:
Buying back shares is always a fantastic idea when the P/E gets low enough and earnings will be somewhat steady as long as the company keeps a safe hoard of cash for emergencies. Let's say earnings drops to $1.40 for 2 years in a row. This would be a P/E of about 5. That means they are getting a 20% return on their money for all shares that they can purchase under $7.
For simplicity's sake, lets assume there are exactly 5 million shares outstanding and $22,500,000 in liquid assets, $7,000,000 a year in profits and a $7 stock price. If they were able to buy back 50% of the company at $7.00 per share, they would need $17,500,000. Assuming they were getting a 10% return on the $17,500,000 liquid assets (probably a very aggressive assumption), then earnings would drop by $1,750,000. to $5,250,000. With only 2.5 million shares left, the earnings would have jumped from $1.40 per share to $2.10 per share if they were able to buy back 1/2 of the company at these fire sale prices. If the dividend were $1.00, instead of having to pay out $5 million per year (leaving $2 million of the $7 million accumulating in equity), only $2.5 million in dividends would be paid out, (leaving $2,750,000 of equity accumulating with only 1/2 as many share. So, unless they can invest at a rate faster than 20-25%, their stock is an incredible investment under $7.00 assuming that earnings will remain $1.40 or higher. If earnings can stay near $2.50, then it would only take 3 years of earnings to completely pay for the investment!!! I love it when companies with P/E of under 7 buy back their stock. It essentially gives them 100/7 or 14% earnings growth just by stagnating, and if you have talented management on top of that, then you will get internal growth also.
So... A STOCK BUYBACK at these prices is an INCREDIBLE INVESTMENT if the company can continue to earn $1.40 or more. It is NOT just to support the stock price, but to increase the earnings stream value of the company per share held.
Richard |
