SINGAPORE (July 16): Share buybacks are quite common and part and parcel of capital management. If a company has excess capital, it can either pay it out as dividend or repurchase its own shares, or invest in a business or asset that can give shareholders a higher return.
The reason why companies undertake share buybacks is best summed up in a letter to Berkshire Hathaway’s shareholders dated Feb 25, 2012 by Warren Buffett, the company’s largest shareholder and chairman. He said Berkshire Hathaway had bought US$67 million of its own stock in 2011 before the price advanced beyond “our limit”.
“Charlie [Munger] 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,” Buffett had written. He acknowledged that he has no way to pinpoint intrinsic value, and indicates that book value per share is a reasonable proxy for it.