Mining buy backs won’t help everyone
EXCITEMENT returned to the Australian market this week with news of share buy backs in the mining sector. The miners have stolen the limelight from the telecommunications sector.
But is now the time to give up your stock in BHP and RIO?
BHP Billiton Ltd (BHP) and Rio Tinto Ltd (RIO) were the catalysts for the market’s strong rise, gaining approximately 5.8 and 9.5 per cent respectively.
While iron ore prices have been strengthening in recent months, it was RIO’s announcement this week of a $2.7 billion dollar share buyback to return capital to shareholders from the sale of coal assets that sparked a greater interest in the sector.
BHP will also announce a buy back after selling US shale oil assets later this year. Smaller stocks such as Independence Group NL (IGO) and Western Areas Limited (WSA) also benefited.
While a buyback may provide short term gains for some investors, it’s often the institutional funds pushing company boards to hand over cash that are the real winners because it will improve the funds’ return in the short term.
But is this really in the best interests of the company and shareholders longer term? I don’t believe so.
Of all sectors on the Australian market, the mining sector has the most significant upside potential; I believe there’s more money to be made for shareholders if the company invests the money.
So consider carefully whether it is worth giving up the opportunity of a future gain for short term income.
The stock price will drop after the buyback price is announced, so who will benefit most in the short term? Super funds and retirees, but not those on higher tax brackets, as the largest component of the payment is a fully-franked dividend. And you have to hand over your shares at a discount of between 8 and 14 per cent.
Right now, the market is at an interesting juncture. It needs to pull back for a couple of weeks into October, however if the market remains buoyant it is likely to rise towards 6600 points in 2018, rather than in 2019. Dale Gillham, is chief analyst at Wealth Within and author of Accelerate Your Wealth.