Lack of appetite for buybacks diminishes long-term returns
South African boards need skilled capital allocators who can read market and act boldly, writes Shaun le Roux
Our assessment of the likelihood that a management team is going to enhance long-term shareholder returns is a cornerstone of our investment process. Boards that are skilled capital allocators will have an outsize effect on investment outcomes over the long run. Unfortunately, few South African boards fully grasp the different capital allocation opportunities — in particular, the effect opportunistic share repurchases can have on value creation. Shareholders own shares, so their long-term outcomes need to be measured on a per-share basis. All things being equal, if a company were to buy back and retire its own shares when they trade at a discount to a conservative measure of their intrinsic value, the per-share value of the remaining shareholders grows A share repurchase reduces the number of shares outstanding, in the process increasing earnings per share. More importantly, it raises the inherent value of the remaining shares. Similarly, long-term returns can be enhanced by issuing...
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