AP
A few weeks ago, FTSE rebalancing
happened in which AP got removed due to lack of liquidity. A few weeks after
that, AP decided to initiate a share buyback program that would cause their
public float to fall below the 20% threshold, an action that gives an
implication that AP does not care about being part of any of the indices. It is
within the PSE’s rule that stocks that are in the index should have a public
float of at least 20% otherwise they will get removed. Nevertheless, AP
continued the share buyback program using their internally generated funds, a
move that has been controversial to some investors after seeing many companies
in the PSE voluntarily delisting. In addition to the controversy, everybody
knows that a stock being removed from an index will cause the share price to
possibly drop within significant levels since institutional investors that
track the index will have to dump their shares at whatever price is in the
market. That being said, investors question whether AP is looking at the
welfare of its shareholders considering that AP is one of the low-risk and
conservative options for investment due to its historical record. AP, however,
clarified that they intend to stay in the PSE and that the buyback program is
due to reasons that their share price in the market does not reflect the
intrinsic value of the company and its future business prospects. They claimed
that the share buyback program would further create shareholder value.
To understand AP’s claim, we’ll
have to see possible scenarios of how the share buyback program would add value
to shareholders. Share buyback programs would reduce the number of outstanding
shares being traded in the market. Whatever net income AP will achieve from
hereon is going to be equally distributed to a fewer number of shares hence the
earnings per common share will increase. With fewer shares that are backed by a
fundamentally sound company, it will attract higher demand that would possibly
lead to higher chances of capital appreciation. On the other hand, in terms of
dividends, it is going to be equally distributed to a smaller number of shares
hence the dividends per share will also increase. With the current state of our
market, at least from a long-term investor’s point of view, we can’t expect
earning from capital appreciation these days. Foreign investors, who have
always been moving the PSE stock share prices, are slowly reducing their
exposure in our market. However, for dividend investors, this may not be much
of an issue.
AP has a dividend payout policy
of paying 50% of its net income. The last dividend payout amounted to at least
13.5 billion PHP or 1.87 PHP/sh and that was when there were approximately 7.3
billion outstanding shares in the market. AP has been buying back shares for a
few weeks already and currently, there are approximately around 7.2 billion
outstanding shares left in the market. If we assume that AP will distribute
another 13 billion PHP of dividends next year, then the dividends would have
increased to approximately 1.90 PHP/sh. We are, however, putting an assumption
here that AP’s earnings will sustain or grow moving forward which is very much
likely since we are still in an environment where power supply margin is low,
demand is elevated, and rates are high.
Nobody knows when will AP stop
the share buyback program hence the above-mentioned projected dividend may
still change. We can, however, at least gauge how long this share buyback
program will last based on their recent financial report. As of the 2nd quarter
of this year, AP approximately has 60 billion PHP in cash. AP has already spent
4.3 billion PHP in share buybacks and on average, AP spends 45 billion PHP
quarterly for operational expenses. Having those as given, we can
conservatively assume that AP is left with 10 billion PHP that they can use to
do more share buybacks. But then again, we can’t assume that AP will use
everything for share buyback because they still need to leave cash for the
declaration of dividends next year. AP needs at least 13 billion PHP to sustain
the previously declared dividends which they do not have right now as per
computation. That’s okay because we haven’t factored in yet the performance for
the 3rd and 4th quarter of the year which we expect AP to do fine or at least
do better due to market conditions.
