On Nov. 26, Samsung (NASDAQOTH:SSNLF) announced that it will initiate a share repurchase plan good for $2 billion worth of its own stock. This is good for something on the order of 1% of the company's shares outstanding, which means that it's not going to do much to move the needle. To be quite frank, this buyback program looks as though it's more for show than a genuine effort to return excess cash to shareholders.
Samsung has how much cash on the books?
According to its most recent earnings release, Samsung has approximately $63.3 billion in net cash and investments on the books, representing approximately 34% of the company's entire market capitalization. It's no surprise that many in the investment community have seemed anxious to see Samsung more aggressively return cash to shareholders.
Now, Samsung's head of investor relations has been quoted as saying:
If you're saying, "Why don't we take a bunch of cash that we're holding and just buy a bunch of shares," my company's position on that is that we believe we may need to use that cash on things that are possibly to come, like new technologies.
This, in my humble opinion, doesn't make sense. Allow me to explain why.
Cash on the books is to be used for "new technologies" only if your business is awful
Samsung claims that it might need to use the cash on its balance sheet to fund "new technologies." However, note that Samsung, like most companies, allocates a proportion of its revenue stream to research and development expenses. The only time a company would need to dip into its cash balance would be if the business as it stands were losing money.
To put this into perspective, last quarter Samsung sold about $43 billion worth of product. On those sales, the company generated about $15.15 billion in gross profit, and even after all of its marketing and research and development spending (i.e., investments in "new technologies"), it raked in about $3.7 billion in operating profit.
At current operating expense levels, Samsung would have needed to see revenues drop to just $32.43 billion in its most recent quarter to see its operating income drop to $0. And even if it were to see those revenue levels on a quarterly basis, Samsung probably has a lot of fat in its operating expenses that it could trim.
The buyback should have had a zero tacked on
A $2 billion buyback for a company with $63.3 billion in net cash and a market capitalization of about $183 billion looks like a token gesture rather than a serious attempt to build shareholder value. If the company were to announce something on the order of a $20 billion buyback, then I think the investment community would sit up and take notice.
Until then, though, Samsung's unwillingness to buy back shares with its oversized cash hoard even at just over 7 times trailing-12-month earnings per share doesn't do much to instill shareholder confidence.
Ashraf Eassa and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.