Here’s an adaptation of Warren Buffett’s explanation of why shareholders in a company involved in a buy-back (e.g. Blue Label Telecoms) would want to see its share price fall over the buy-back period. Charlie and I favour repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated. Say Company X has 1.16-billion shares outstanding, of which you own about 63.9-million or 5.5%. Naturally, what happens to the company’s earnings over the next five years is of enormous importance to you. Assume the company will likely spend $50bn or so in those years to repurchase shares. Our quiz for the day: what should a long-term shareholder cheer for during that period? I won’t keep you in suspense. They should wish for the stock price to languish throughout the five years. Let’s do the math. If the...
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