After 35 years of stockbroking for some of the biggest houses and investors in Australia and the UK, the Secret Broker is regaling Stockhead readers with his colourful war stories — from the trading floor to the dealer’s desk.

Finally, this week I get to talk about share buy backs, having been distracted from the subject over the last two weeks.

A share buy back is basically a company telling you that they can’t find a better investment to increase shareholder value. Therefore, they decide that the best way to increase the company’s valuation is to buy back shares in themselves.

Any shares bought back by the company then get cancelled, so the company’s value rises as there are now less shares on issue.

A 10% buy back should therefore increase the value of the company’s market capitalisation.

For example, a company with 100m shares on issue, who then buys back and cancels 10m of them, now only has 90m shares on issue but has the same NTA (less the cash shelled out).

I always had a spreadsheet going which covered the ASX listed companies that were buying back their own shares.

It would show me daily what their targeted buy back percentage was and the highest and lowest prices the company had paid.

Also, when once or twice a year the market got smacked on the head and everything was being marked down, I knew which stocks to outbid their buy back brokers on.

So, the list was basically like my bible of healthy companies with piles of spare cash, but also a bit boring.

You know when a band you follow brings out a greatest hits album? A company announcement declaring a share buy back is like that.

Sure there may be an extra ‘never released before track’, or everything has been ‘digitally remastered’, but it is disappointing. You know they are just being lazy.

In the case of a listed company, the ‘extras’ are normally tax-related, from their pre-partying days, and now they’re left nursing a hangover of franking credits.

It’s a bit of a Goldilocks call. The company’s saying its outlook is not not too hot, not too cold, but just about right.

Unless of course you are not a company like Woolworths but a company like Apple.

Woolworths’ apple logo is where any comparison stops dead, after Woolies’ recent $2bn off-market buy back. Over the last eight years, Apple has bought back shares worth US$421bn, thus reducing its outstanding amount of shares by 35%.

However, Apple still has net cash of more than US$80bn and will likely produce more than US$100bn of free cash flow every year going forward, even with COVID.

Therefore, Apple’s buyback program is virtually an infinite pump and now it has a valuation of US$2.5 trillion.

Every three months it announces how much it has spent buying back and cancelling shares. The average spend from 2013 is US$15.67bn.

Let’s compare the pair, as they say.
 

Spoon me

Now, Woolworths market capitalisation today is $50.17bn or US$30.6bn, which means Apple can buy a company like Woolworths, every six months of the year… just out of its free cash flow.

A couple of years back, Woolworths invested some of its free cash flow into a home food delivery company called Marley Spoon.

As soon as Marley Spoon shares came out of escrow, Woolies sold them for a $24m profit, thus turning its original $30m into $54m.

You have to think to yourself that surely a company like Woolworths could take $100m from its cash flow and invest it internally to produce an industry-wide solution that other supermarkets could use around the world. And pay Woolies for it.

It’s a classic Australian-listed company trait. Shareholders demand mature companies pay out profits in the form of fully franked dividends, which stifles any good old entrepreneurial spirit that was used to get the company started and to where it is today.

Shareholders demand money in their pockets now rather than in 10 or 15 years. Maybe it will need this older generation of shareholders to die off before corporate Australia cottons on and creates a company like Apple.

Look at Canva, a privately owned Australian software company. Its shares just got priced at the same valuation as Woolworths.

It was only started nine years ago and with a lot less than $100m to kick its idea off – a lot less than an investment in Marley Spoon.

These mature listed companies need to grow a pair and use their resources to create solutions that could one day become more valuable than their parent.

Their current ‘an Apple a day keeps the shareholders at bay’ attitude needs to change. Maybe ‘planting a seed grows a tree indeed’?

My portfolio is now like an orchard!

The Secret Broker can be found on Twitter here @SecretBrokerAU or on email at [email protected]

Feel free to contact him with your best stock tips and ideas.