My thoughts on share repurchases.
The fundamental questions is whether Deswell is a growth stock, or a value stock. It is pretty clear that Deswell is a growth company, with historical growth near 50% annually, and a ROE of over 30%. But the stock is trading like a value stock. Why? Here is one person's view (Paul Senior, who I respect more and more, and have much to learn from.):
Message 5982442
Decreasing the cash available probably just limits the growth of this company. The company has shown they have been able to invest and get a ROI over 30%. If they keep that up over the next five years, then the micro-cap stigma will be erased, and we may finally see a reasonable market for these shares. (The same rationale could be made for reducing the dividend payout.)
Personally I would love to see a share repurchase, since I believe that the company shares should rally nicely from today's prices. Thus investment returns on such a repurchase could easily exceed 50% and thus probably exceed alternative investment ROIs. Also it sends a strong message by management about the future of their company.
But the decision to repurchase shares, or to use the cash to pursue growth opportunities depends on the quality and size of the growth opportunities. In the past, the company seems to have generated enough cash to support a 50% annual growth rate, and still have plenty of money left over to pay a healthy dividend. From this I conclude that the company either:
- isn't comfortable shooting for higher growth rates than 50%
- isn't limited by investment capital as much by opportunities or skills or other issues
Only management is in a position to fully evaluate growth strategies and opportunities, so shareholders are really not able to conclude which is the best use of the cash. However, if the company has a choice between raising the dividend, or buying back stock, my choice is clear. Buy the stock back.
Paul
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