The power of stock buybacks | Recent Trades - All 7 today |
| 10:40:14 | M | 7.50 | -0.10 | 60 | 7 TD Sec | 2 RBC | |
| 09:39:33 | T | 7.50 | -0.10 | 200 | 200 Acumen | 7 TD Sec | K |
| 09:39:33 | T | 7.49 | -0.11 | 100 | 200 Acumen | 79 CIBC | K |
| 09:39:33 | U | 7.50 | -0.10 | 300 | 200 Acumen | 1 Anonymous | K |
| 09:39:33 | U | 7.49 | -0.11 | 400 | 200 Acumen | 1 Anonymous | K |
| 09:39:33 | T | 7.49 | -0.11 | 100 | 200 Acumen | 1 Anonymous | KL |
| 09:30:00 | T | 7.49 | | 50 | 19 Desjardins | 7 TD Sec | |
| 09:30:00 | T | 7.49 | | 1 | 80 National Bank | 84 Ind Trading |
Each day that I see that Acumen has bought 1,100 shares for GH, puts a big smile on my face and warms my heart.
Buying $1.00 for $0.55 - $0.63. Smart. Very smart.
The only thing that I like seeing more than the daily 1,100 shares being repurchased by Acumen is when I see
larger amounts being repurchased. Those days are truly great.
As you all know, I love, absolutely love, a company that buys back their stock when and only when it is trading below its intrinsic value. Buying back $1 of assets for much less than $1 is the way that shareholders get richer. Buying back $1 of assets for $0.55 - $0.63 is the way to get seriously richer. That is what GH is doing. You gotta love it!
Shortly after I left the industry in 2014, I decided to give a few investing classes and I would use an example similar to the one below to explain the power of stock buybacks (it comes out better in person):
I'm going to use the concept of "owner earnings". This is very similar to free cash flow but is generally more restrictive, conservative. Think of it as a more realistic picture of a company's profitability. In analysis you always want reality and conventional accounting has its limitations.
Back in 2019 GH had:
- $19.5M in owner earnings (profitability)
- 24.3M shares outstanding
- $0.80 in owner earnings per share (OEPS)
- GH stock price of $8.48 (end of calendar year)
Now let's assume that for the next 10-years, GH always earns $19.5M each year in owner earnings.
Now lets also assume the Company uses this yearly $19.5M to buy back its stock and that its stock price always trades at $8.48. The Company would be able to buy back 2.3M shares each year.
After 10 years, GH now looks like this:
- $19.5M in owner earnings (profitability)
- 1.3M shares outstanding (Company has bought back 23M shares over 10 years)
Now after 10 years there are only 1.3M shares outstanding and the Company is still earning $19.5M in owner earnings.
In year eleven the Company buys back 1,299,299 shares out of the 1,300,000 shares outstanding.
After 11 years there is only 1 share outstanding and
you happen to own that share. You now own the entire Company and so when in year 12 GH makes another $19.5M in owner earnings, all of that profit belongs to you and all future profits also belong all to you.
That is the power of stock buybacks.
Now, if you wanted to sell your one share, at what price would you sell it for? Well you are selling the present value of all future earnings and you know it will comand a very high price indeed.
In reality, stock buybacks, especially when done at a price below intrinsic value, cause a rerating on the price of the stock and force it higher because the above exampple should not occur and would not occur. Why? Because the owner earnings on a per share basis rise and therefore each share is more valuable and investors will
always bid it up
over time.
Always!