Would Warren Buffett approve of Telstra Corporation Ltd's share buyback?

Telstra Corporation Ltd (ASX:TLS) today launched a $1 billion share buyback upon the release of its full-year results.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

What: The shares of Telstra Corporation Ltd (ASX: TLS) rose 11.5 cents or 2.21% to $5.56, helping to boost the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) to a late afternoon rise of 0.7%. The rise in Telstra was partly attributable to a higher dividend and the intended buyback of $1 billion shares.

What is the intention of a buyback?

The first point is that shareholders are given the choice of whether or not to sell. The advantages are many and varied including:

Making good usage of surplus funds.

Lifting earnings per share (EPS).

Providing shareholders a price nearer to asset value if the share price is below net tangible assets (NTA) backing.

What does Warren Buffett think of share buybacks?

Buffett said: "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".

Telstra shareholders will be hoping that the second condition holds true. However, valuation is in the eye of the investing community who have price targets for Telstra ranging from $4.35 up to $6.00 per share. Certainly the company meets the first requirement by generating massive free cash flows (FCF) that have allowed for an increased dividend and any mid-size acquisition opportunities. Guidance for FY2015 is for $4.6 billion to $5.1 billion of FCF.

An additional reason for this share buyback

In a video broadcast, Telstra chief financial officer Andy Penn stated that the company had a one-off increase in the franking balance of $258 million. With a looming reduction in the company tax rate and hence the value in the franking credits, he was conscious of returning these credits to shareholders as soon as possible. Hence the buyback is structured so that the fully franked dividend component is equal to the difference between the buyback price and a capital component of $2.33 per share.

Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article. Mark Woodruff has an indirect interest in Telstra Corporation Ltd

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »