Hongkong Land announced on 6 Sep 2021 to buy back its shares for up to US$500 million. That’s about 5% of its market cap and hence a sizeable repurchase programme.
The market welcomed the news and it sent the share price up by 12.6% the following day!
But the euphoria died off quickly. The ongoing Evergrande FUD and its impact on Hongkong Land’s position as a property developer won resulting in a quick sell-off after the surge.
Since then, the Evergrande issue has diminished and the power of the share buyback continues to spur the share price higher:
What is a share buyback and is it really good?
Warren Buffett once said,
“The best use of cash, if there is not another good use for it in business, if the stock is underpriced is a repurchase.”
In a nutshell, share buyback is a good thing if the share price is low and the stock is undervalued.
The management has to know how to allocate capital and not just run operations. Share buyback is one of the options that has to considered.
A typical capital allocation priority should be in this sequence (taking a slide from my course):
- A company should generate cash from its operations
- It should keep the bankers and bondholders happy by repaying the debts
- Equipment needs to be maintained to ensure operations do not deteriorate
- Pursue expansion when opportunities arise
- Do share buybacks if stock is undervalued
- Distribute dividends
You will notice that share buyback has a higher priority than dividends. I am not sure if it comes as a surprise to you.
When are share buybacks are better than dividends?
There are scenarios whereby share buybacks are more worthwhile for investors.
Let’s take Hongkong Land as an example. It has a book value per share of $14.75. The stock is obviously undervalued at $5.
A share buyback means creating $1.95 of additional value for shareholders for every $1 spent in this Hongkong Land scenario. Now compare this to giving you $1 dividend where you only get, well…$1. Hence, it is more beneficial for shareholders when Hongkong Land do a share buyback.
In addition, the share buyback will decrease the number of outstanding shares and that means that the per share value should go up, resulting in capital gains for the shareholders who didn’t sell. Although a shareholder doesn’t get the cash like dividends, they benefit indirectly when share price rises.
But share buyback alone doesn’t always push the share price up. There can be other factors at play that can affect the stock price.
That said, Hongkong Land still gave out dividends of US$0.06 per share for the 2021 interim period. This amount is the same as per 2020 and was not reduced despite the share buybacks. It is likely that they will give out once more at the end of the financial year. They can afford it considering that they have US$2.4 billion of cash during the mid-year update.
How much share buyback has been completed and will there be more to boost the share price?
The buybacks have been well-paced and were done on almost every trading day, taking up less than half of the daily trading volume. This is important because buying back US$500m worth of Hongkong Land shares in one day would push up the share price too fast and make the share buyback too expensive. The daily transaction value is about US$5m.
The only exception was on 1 Oct 2021 where the buyback was 52.7% of the trading volume of the day.
Hongkong Land has utilised about 9.7% of its US$500m for share buybacks over the past 1.5 months. There’s still another 90.3% to go until Dec 2022. I believe there is more upside to come barring any negative news about the stock market or the stock itself.
If you want the details of the buybacks to date, I have tracked them in the following table:
| Date | # of shares | Price | Value | Cumulative | % of $500m | Trading Volume | % of trading volume | Price Change |
|---|---|---|---|---|---|---|---|---|
| 7 Sep 2021 | 320,000 | $4.67 | $1,494,784 | $1,494,784 | 0.3% | 9,242,000 | 3.5% | 12.62% |
| 17 Sep 2021 | 626,500 | $4.51 | $2,825,515 | $4,320,299 | 0.9% | 8,826,000 | 7.1% | -2.79% |
| 20 Sep 2021 | 800,000 | $4.41 | $3,524,000 | $7,844,299 | 1.6% | 4,539,000 | 17.6% | -4.42% |
| 21 Sep 2021 | 308,400 | $4.40 | $1,356,960 | $9,201,259 | 1.8% | 3,211,000 | 9.6% | 1.62% |
| 22 Sep 2021 | 200,000 | $4.42 | $884,000 | $10,085,259 | 2.0% | 1,694,000 | 11.8% | 0.45% |
| 24 Sep 2021 | 258,800 | $4.63 | $1,198,244 | $11,283,503 | 2.3% | 3,046,000 | 8.5% | 1.30% |
| 27 Sep 2021 | 417,000 | $4.75 | $1,978,665 | $13,262,168 | 2.7% | 3,685,000 | 11.3% | 2.14% |
| 28 Sep 2021 | 266,800 | $4.80 | $1,279,306 | $14,541,474 | 2.9% | 1,981,000 | 13.5% | 0.21% |
| 29 Sep 2021 | 279,500 | $4.64 | $1,296,880 | $15,838,354 | 3.2% | 1,906,000 | 14.7% | -0.63% |
| 30 Sep 2021 | 977,700 | $4.79 | $4,683,183 | $20,521,537 | 4.1% | 4,376,000 | 22.3% | 1.05% |
| 1 Oct 2021 | 1,349,700 | $4.81 | $6,492,057 | $27,013,594 | 5.4% | 2,562,000 | 52.7% | 0.21% |
| 4 Oct 2021 | 560,700 | $4.84 | $2,713,788 | $29,727,382 | 5.9% | 2,589,000 | 21.7% | 1.04% |
| 5 Oct 2021 | 386,700 | $4.84 | $1,869,695 | $31,597,077 | 6.3% | 1,795,000 | 21.5% | -0.21% |
| 6 Oct 2021 | 345,000 | $4.83 | $1,664,625 | $33,261,702 | 6.7% | 1,552,000 | 22.2% | 0.00% |
| 7 Oct 2021 | 583,000 | $4.86 | $2,830,465 | $36,092,167 | 7.2% | 2,450,000 | 23.8% | -0.21% |
| 8 Oct 2021 | 598,300 | $4.89 | $2,925,687 | $39,017,854 | 7.8% | 2,834,000 | 21.1% | 1.65% |
| 11 Oct 2021 | 407,000 | $4.93 | $2,004,475 | $41,022,329 | 8.2% | 1,851,000 | 22.0% | 0.00% |
| 12 Oct 2021 | 267,500 | $4.92 | $1,316,100 | $42,338,429 | 8.5% | 1,388,000 | 19.3% | 0.00% |
| 13 Oct 2021 | 273,000 | $4.93 | $1,344,525 | $43,682,954 | 8.7% | 1,298,000 | 21.0% | 0.20% |
| 14 Oct 2021 | 276,000 | $4.95 | $1,366,200 | $45,049,154 | 9.0% | 1,248,000 | 22.1% | 0.41% |
| 15 Oct 2021 | 310,100 | $4.98 | $1,542,748 | $46,591,901 | 9.3% | 3,164,000 | 9.8% | 1.41% |
| 18 Oct 2021 | 364,800 | $5.02 | $1,829,472 | $48,421,373 | 9.7% | 1,546,000 | 23.6% | -0.40% |
Conclusion
I think this is a good move by the management. Share buyback is a good thing when the stock is undervalued and it is obvious the management believe Hongkong Land is currently trading very cheaply to announce a big buyback programme.
The effect has been a positive one and the share price has risen steadily since the programme started.
Despite committing to this buyback, Hongkong Land continued to give out dividends. I would think that it would be even better if they can use the cash for more buybacks instead of giving dividends. The $1.95 value creation for every $1 spent is too good a deal. But I guess some shareholders will be unhappy if no dividends were given.
Hongkong Land can afford to do both because it has $2.4 billion worth of cash to deploy. This also tells you that its financial position is very strong, and not really hurt by Covid-19 or Evergrande issue.
Hongkong Land share price should see higher upside, barring other major events, as they have another US$450 million to conduct its share buyback activities.
“A share buyback means creating $1.95 of additional value for shareholders for every $1 spent in this Hongkong Land scenario.’ May I know how to count $1.95? if 14.75 divided by 5 should be $2.95.
cos they spend $1. So $2.95 – $1 = $1.95 additional value