It has been a slightly frustrating time for me on my long term investment journey. I am fully invested, and have no free cash to invest. This is particularly frustrating when you know there are some stocks that are good value, and you just have to watch them creep up slowly from the sidelines. I have said before that my biggest mistake to date has been impatience so this is really my own fault, and is another lesson learned. I have also written about my hotel saga, which looks likely to conclude at the end of February 2017 (according to a company circular released this week), which has tied up about 10% of my portfolio in an illiquid stock, but at least there is a possible end date with the promise of a good return on investment and cash injection.
In the mean time I have been doing an enormous amount of research, I have requested annual reports from a number of target companies, and in general I have been preparing for better times.. I have done an interesting trade too, but will touch on that later.
However, despite all that I have written here, suggesting that I have merely been a spectator to the market, I have been buying! I am sure you are wondering whether I have been drinking or am going mad due to watching the bargains slip away. Hopefully you are just wondering how that is possible.
Okay, technically I have not been buying stocks, but at least two companies, in which I coincidentally have my largest stakes, have both been or have plans to buy back stocks from the market. This is also known as a stock repurchase or stock buy back. Essentially the company buys its own stock and then either holds the stock in a treasury account or cancels the stock. The net effect is that my overall equity stake in the company will increase, without me laying any cash of my own down. To me this is as good as buying the stocks myself.
One of the stocks, Grand Parade Investments, which owns the Burger King and Dunkin Donuts franchise in South Africa, have recently announced that they have bought back 24 million of the previously 488 million shares. So without spending a cent, I now own an extra 5% of my Burger King and Dunkin Donut franchises, as well as other assets they own. I am especially happy because I feel the stock is undervalued, so it is a good use of the companies cash.
The other company, Trustco, is a diversified financial services company in Namibia. They have entered into an agreement to buy 41 million out of a total of 772 million shares from one of the large asset managers. Again, this will result in me effectively increasing my equity stake by 5%, for no money down. This deal is a little more difficult to evaluate as they are paying a premium to where the current share price is. However, it could be argued that in order to get your hands on a block of stock this size would cause the price to rise substantially.
I am not alone in being pleased by these stock buy backs. Warren Buffett has often mentioned in his annual Berkshire Hathaway letter the effect of stock buy backs. His favorite example is that of Coca-Cola. He finished buying his stake in Coca-Cola in the early 90’s and at the time had 400 million shares (split adjusted) for an equity stake of around 7% of Coca-Cola. Berkshire Hathaway still owns 400 million Coca-Cola shares. Warren Buffett has not bought any more stock for over 20 years in the company, but they now own over 9% of Coca-Cola. If this seems petty to you, remember that you could also buy 2% of the Coca-Cola company for around 3.6 billion dollars if you have the money.. The reason for his ‘free’ extra 2% is that the Coca-Cola company has consistently been buying back its own stock. This makes Berkshire Hathaway’s 400 million shares a bigger proportion of the overall number of shares.
Hopefully a clever trade (and more free shares)
Related to the share buy backs is the fact that the company referred to above, Grand Parade Investments, owns a 10% stake in another favorite company of mine, called Spur, which is also in the restaurant and fast food business. They have increased dividends for over 20 years. Recently Grand Parade Investments has said that they have reached an agreement with a fund manager to buy up to 19 million shares in Spur. So I will also be getting more Spur shares, with no money down.
In addition to the ‘free’ shares, I have spotted what I believe to be a good trade. The shares of Grand Parade Investments do not price in the food assets, but only their assets in the gaming sector. So you are effectively not paying for the Spur shares. As such I felt it was a low risk trade to sell my Spur shares and use the proceeds to buy Grand Parade shares, as I would effectively be buying back Spur shares for free which are held by Grand Parade, while also getting the gaming assets.
Disclaimer: The above trade is risky and probably not recommended, but as an aspiring Dividend Tycoon I am looking for an edge and when I see a free lunch (excuse the pun), I grab the burgers! (and Donuts). Hopefully in time I will be proved right, but I may need to be patient.