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Is the share buyback program 2018 of Ahold Delhaize a good thing?

Ahold Delhaize announced a new share buyback program.

I missed this one completely, but I think it is very interesting and therefore I think it is nice to write a blog post about. Not only about the share buyback of Ahold Delhaize, but also to look at it from a DGI point of view.

 

Share buyback Ahold Delhaize 2018

During the presentation of the Q3-results in early November 2017, Ahold Delhaize (AH.AS) announced a new share buyback program. In 2018 Ahold Delhaize will return €2 billion through this new share buyback program; this is almost 10% of the current market value. The program is expected to be completed before the end of 2018.

 

Polliesdividend.com

 

In 2017 Ahold Delhaize launched its Better Together Strategy. An important part of the financial framework that supports this strategy is a balanced approach between funding growth in key channels and returning excess liquidity to shareholders. The purpose of the program is to reduce the capital of Ahold Delhaize, by cancelling all or part of the common shares acquired through the program

Ahold Delhaize has commenced this program on January 2nd, 2017. The progress of this program can be seen on a special webpage (here).

 

Opinion

are share buybacks a good option?

Yes, I think that it is a good thing for shareholders. By buying back shares the company is effectively reducing its outstanding shares on the market. And if there are fewer shares outstanding the EPS (Earning Per Share) will be affected by this action. Normally when a company announces a share buyback, investors get excited and the share price will also go up.

In my humble opinion, these are good things for shareholders.

Of course there are also some downsides to buybacks. A share buyback has effect on a company’s income statement because it reduces its outstanding share (duh..). But it also has some impact on other financial statements.

By buying back shares with left over cash, the company will lower its total asset base. By doing this the equity/debt ratio will shift. Due to this shift the company can be valued as more risky. And of course this will have an influence on the decisions investors make.

Okay that’s what I think, lets ask the oracle.

 

What is Mr. Buffett’s opinion?

In his 2011 letter to the shareholders of Berkshire Hathaway, Warren Buffett wrote:

Charlie and I favor 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.

Every time Berkshire Hathaway’s share price falls under a certain level, Warren Buffett said that he automatically picks up shares. When the share prices goes up again, BH can always reissue the shares. And by this BH makes some extra money (which the can put to good use again).

It is safe to say that under the right conditions, Mr Buffett loves buybacks. 🙂

And yes there are also a lot of other (so called) gurus that are against buybacks. A very commonly heard argument is, that it is a weakness of the board of directors. They cannot choose to do the right thing for the growth of the company.

Luckily we live in a free world, where everybody can have its own opinion (and lets al work on it to keep it this way!!! Our freedom of speech, religion and the pursuit of happiness is under pressure the last couple of years).

 

Common sense

When a company has announced a share buyback program, they must use some common sense executing the program. As an average investor I prefer to buy stocks when the valuation of the stock is low. I normally don’t buy stocks when they are highly priced by Mr. Market. This rule and principle must also apply for companies.

When a company’s stock is being highly valued by the market, buying back shares at those high valuations can lead to long-term shareholder capital destruction. And that is something nobody wants. When valuations are sound, or better yet, excessively low, the best investment opportunity a company may have is to invest in its own stock.

If a company executes its share buyback program like this, then in my opinion it is executed correctly.

 

Conclusion

I think that share buybacks, if preformed correctly, are good for shareholders. I love share buybacks.

And if we look at Ahold Delhaize, we can see that the price of the stock has taken a beating after the announcement of Wholefood Market takeover by Amazon. So it is a good time to start buying back some share. 🙂

When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases.” – Warren Buffett

What do you think of share buyback? I like to hear from you

Cheers,

Pollie

 

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7 thoughts on “Is the share buyback program 2018 of Ahold Delhaize a good thing?

  1. Pursuit 2 Freedom

    I like the buyback. It’s one of the reasons I’m bullish on AH for 2018. The programm is huge compared to the outstanding value of the stock. And just as you I believe the valuation is great for buying back shares.

    Only time will tell if we are right!

  2. Abhijit Ray

    One other way to see it is that the company find buying back its share a more profitable idea than investing in growth. It may be a sign that the market is saturated.

    1. Pollie Post author

      I agree, that is also a way to look at it. But I don’t think the market is saturated. Ahold Delhaize have enough room to grow in multiple countries. And they can do this by taking over some other companies. But I like the idea of share buy backs better 😉

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