Consulting: Shares Buyback, Dividends, and the News of Companies

1. Hi Mr. Teguh, I heard that Semen Baturaja (SMBR) would conduct the buyback of shares. What is it? And how it affects the performance of the company?

On September 17, 2013, management of SMBR announced that if needed, they are ready to buy back the company’s shares in the stock exchange, in order to keep the stock price to remain stable. This decision was a response after at the end of August 2013, the Jakarta Composite Index (JCI) tumbled down while the stock price of SMBR dropped from 560 to 360. The amount of funds to do the buyback is maximum Rp102 billion, which is taken from the company's cash deposits (as of Second Quarter 2013, SMBR had cash of more than Rp1.5 trillion, as result of its IPO).

What should be noted here is that the company will buy their shares back only if it is necessary, ie if the stock dropped uncontrollably. So if SMBR movement in the market is still normal, then they will not do the buyback. But if they are actually do the buyback at maximum measurements, then the company's cash position will be reduced by Rp102 billion. If the cash was in a position of to be used urgently for the company's operations, to finance certain expansion activities, or to pay a debt that will mature in the near future, then the company's business activities may be disrupted. But in the case of SMBR, the Rp102 billion fund is derived from 'idle money' that will be used in the future to build a new cement plant in Baturaja, South Sumatera, where the plant itself is scheduled to be operational by 2016 (still a long time). So in this case the buyback will not have any effect on the performance of SMBR, but is expected to be able to keep the stock price from further decline due to market volatility.

From my sight, the state-owned companies are generally quite eager to attempt to keep the stock price from falling, including if they have to spend some cash to do it (through share buybacks). For example, at the peak of global crisis in 2008, a consortium of state-owned companies jointly spent Rp4 trillion to buy back the shares of SOEs in the market. At the time, they (the consortium) were dared to buy shares of BBRI, SMGR, et al at the bottom price, because they are pretty confident that the price was already undervalued when compared to the company's real valuations, so the stocks will eventually go up as well. And indeed, they’re right.

But on the other hand, probably that is why the two state-owned companies, namely Krakatau Steel (KRAS) and Garuda Indonesia (GIAA), never announced that they will buy back their shares, because as their financial performance was poor, the company can not determine what is the actual or fair value of the shares. GIAA was once intends to buy back the shares, but canceled. While for KRAS, the buy back plan is merely a false rumor.

Outside the SOEs, most of business groups do not want to do the same thing (the buyback). In 2008, instead of spending some fund for the buyback, the Bakrie Group asked the IDX to suspend the trading of stock of Bumi Resources (BUMI), so it would not drop deeper. However, it was later known by the Minister of Finance at the time, Sri Mulyani, who gets anger and ordered IDX to lift the suspension. As a result, the stock of BUMI then crashed from 8,000’s to 400’s, and that was the beginning of the conflict between Bakrie Group and Sri Mulyani (she is currently the Managing Director of the World Bank Group). Well, according to you, is it Sri Mulyani or Bakrie, that causes the decline of the stock of BUMI?

More details about the buyback, read here.

2. I want to invest in a long term, and I also want to be able to live just from dividends. So if I may know, what stock that paid dividend in large amounts each year?

If you mean by 'big dividend' is a dividend in a great percentage from the total net profit of the company in a year, then the answer is consumer stocks, such as UNVR, INDF, HMSP, and the like, as the companies usually pay dividend in large percentage of their net profit every year. For UNVR, they even pay dividends as much as 100% of their net profit every year. Other companies that pay big dividends are state-owned enterprises that, of course, has good financial performance, like BBRI, BMRI, SMGR, JSMR, and PTBA.

The problem is, when compared to the price of the stock, a stock with large dividend yield is rarely exists. Okay, sometimes a few companies pay a large dividend in certain year, say Rp200 per share when the stock price itself was only Rp1,000 (its dividend yield is 20%), but how about the next year? Or the years before?

If there is a company that pay dividend in an amount of 7 - 9% of the price of the share every year, for more than ten years in a row, then you could call it a super-stock. But from almost 500 stocks in the IDX, the number of these ‘super-stocks’ are only a few.

But does the value of the dividends increase from year to year, in line with the increasing profit of the company? Yes, it does. Some companies pay dividends in an amount that increase from year to year. So when you receive dividend of Rp100 per share, in the next year the dividend may increase to Rp150 per share, and become Rp250 in the third year, and so on. That is why you can not underestimate the value of dividend just because the value was small in the first year. For example, if you buy the stock of of Astra International (ASII) in 1998, and still hold it until today, you might have received dividends in an amount that far greater than the capital you spend (to buy the stock). A more extreme example is UNVR, where if you bought it in 1982 and still hold it until today, then you might have received gain of tens thousand percent from its dividends only, not including the capital gain.

But to be honest, is anyone has bought ASII in 1998 and still hold it until now? What if it was BLTA, for example, and not ASII? I mean, okay, in the IDX, there are some super-stocks like ASII and UNVR, which pay large dividends continuously. But when compared with the total number of stocks on the Indonesia Stock Exchange, as already mentioned above, the number of these ‘super-stocks’ are only a few, and it takes more than just the ability to invest and also a lot of patience, to be able to find a stock like this, then keep holding it for tens of years.

In the end, capital gains are much more interesting than dividends, for several reasons: 1. In Indonesia, the capital gains, or gains from the increase of price/value of the stock, is tax-free. Meanwhile, if you receive the dividend, the tax was from 10 to 15%, or even more if you are a foreign investor, 2. Dividends are paid only at certain times, while we can realize the capital gains at any time as long as the price is right, and 3. Historical facts prove that it is capital gain that made the billions of fortune of successful investors around the world, not dividends. Until now, Warren Buffett receives dividends in a smaller amount than the gain from the increase in value of the equity of Berkshire Hathaway, except of course in the years in when the market was down, such as 2001 and 2008.

That's why, if you are a long term investor, you shall not expect to be living by dividend. Because if one day you could actually live on dividends, the profits you earn from the increase in value of the assets of your companies (capital gains), will certainly much greater than the dividends you receive. And when the capital gain (which is great) was obtained, then you only have to take a small part of it for your daily needs, while the rest can be used for further investment. All this time, Warren Buffett only living on a salary of US$ 100,000 per year. If he decides to change his lifestyle and spend, let say US$ 10 million per year for parties and expensive cruises, then it still will not affect his wealth/assets at all, because to spend his entire fortune of US$ 40 billion, Buffett needs to live up to next 4,000 years (which is impossible).

3. I have read some news, it is said that Erajaya Swasembada (ERAA) gets Rp2 trillion (US$ 200 million) of debts. Is it real or just a rumor? And if it’s real, what is its effect on the performance of the company?

When you read the news about a company that performs some corporate action, whether it's in the newspaper or the internet, then to ascertain whether it is real or just a rumor, you can open www.idx.co.id, then click IDXNet (red colored). On the next page (page of announcement of the listed companies), you enter the stock code that you are looking for in the box 'kode', for example in this case ERAA, then click the 'Cari' button (‘Cari’ is Indonesian term for search). Then there will appear the official announcements released by ERAA, including the matter of the debt, if the news is real. Here is the page view on idx.co.id after I enter the code ‘ERAA’, and click on the 'cari', click to enlarge.

After you downloaded the file (it’s PDF), then you can then read the announcement. Here is a view of the announcement, click to enlarge:

Anyway, if you read the announcement, ERAA, with some of its subsidiaries, is obtained a loan ceiling from Bank BCA for a maximum of Rp2 trillion, but that does not mean that ERAA already disbursed it entirely, but will be disbursed later as needed. Unfortunately there is no further information about what the loan will be used, but usually the information will be presented in the detail of ERAA’s next latest financial report.

Of course, the extraordinary problem here is if you are not fluent in bahasa (Indonesian language), then you cannot read the announcement, because the english version of the announcement is not available (and also for other announcements of other companies). So at this point you may have to work with translator, or a fund manager that is fluent in bahasa.

But let’s back to matters, what if I read a particular story or news about a particular company, but after I checked the website, there is no related announcement? Then it is likely that the news was just a rumor. For me, every time I hear about important news about certain company, then the first thing to do is to check it on the website to IDX. That is why I could say that the information of SMBR’s shares buyback is correct because the official announcement about it was actually released, while the same news of KRAS is just a rumor. This action of 'asks a confirmation directly from the company' is important, so you wouldn’t get caught by the rumors that might deliberately released by certain parties.

Some friends of mine have complained that investing or trading in stock in Indonesia is totally different than investing in developed countries like the United States. To invest in stock in Indonesia is far more difficult because the available information is much more limited, and we also often have difficulties to mark off the invalid information. But actually, if you are willing to take some time to explore the website of www.idx.co.id, then you may find all of the information you need related to the companies/stocks. Yup, everything is there, and the information is also valid because it comes directly from the company itself, not from of journalists or other third parties. Anyway, based on the above example, then at least you now can tell which is the real news, and which are the rumors.

More about how to analyze the media coverage, read again the article here.