Why is A2 Milk buying back shares?

A2 Milk Co Ltd (ASX: A2M) delivered some bullish news to investors in its earnings card for FY22 posted on Monday last week.

Not only did net profit after tax (NPAT) surge 42.3% to NZ$114.7 million (A$103 million) but it also announced it will repurchase NZ$150 million (AU$ 135 million) worth of shares from the market.

Share buybacks can sometimes be seen as a signal that the company believes its shares are undervalued. It also means shareholders effectively own a larger piece of the company since the number of shares on the market goes down.

Considering these details, let’s consider why A2 Milk is buying up its shares.

Why is A2 Milk buying its own shares?

Several factors combined over FY22 to allow the company to announce a large share repurchasing plan. One is A2 Milk stepping up its presence in China. The company said this led to record market share for its Chinese-labelled infant formula in mother and baby stores and the domestic online market in China.

This carries over to a positive outlook for FY23. The company expects high single-digit growth in revenue, as well as a boost in its earnings before interest, tax, depreciation, and amortisation (EBITDA), and EBITDA margin.

These factors strengthened A2 Milk’s balance sheet, with its net cash line item ending at $816.5 million for the period.

It’s reported the company’s board of directors discussed alternative options but decided that a share buyback was the best use of its capital.

A2 Milk will buy back 37.18 million shares from the market, or around 4.9% of its total outstanding shares of 743.66 million.

The buyback will commence on 28 September and is expected to be completed on 28 August next year.

The A2 Milk share price snapshot

The A2 Milk share price is down 0.87% at the time of writing.

Shares of the infant formula company currently trade at $5.68 a share.

That puts them up around 4% year to date. Meanwhile, the S&P/ASX 200 Index (ASX: XJO) is down 9.4% over the same period.

The company has a current market capitalisation of around $4.2 billion.

The post Why is A2 Milk buying back shares? appeared first on The Motley Fool Australia.

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Motley Fool contributor Matthew Farley has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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