at the moment — those that are raising capital and those that are handing it back to shareholders.
Both approaches have their benefits, depending on what the cash is being used for.
For shareholders in the gift that keeps on giving — blood plasma and vaccine group CSL — the effective capital return comes in the form of a $950 million buyback.
This is the eighth buyback in nine years, taking the total to an impressive $4.2 billion and effectively reducing the number of shares on issue by 23 per cent.
For Australian-listed companies with a majority of assets offshore such as CSL, this is a very effective way of returning cash to shareholders in lieu of franked dividends.
It is also a huge vote of confidence by the CSL board that buying and cancelling its own shares is one of the best destinations for the wads of cash the company is earning.
The problem for the traditionally acquisitive CSL is that it has reached such a size that it will struggle to get regulatory approval for any further takeovers in its core plasma business.
Investing in related biotechnology fields is an option but most of these acquisitions would reduce or dilute short-term shareholder returns, plus it is inventing its own new products.
For shareholders, the buybacks boost the company’s earnings per share significantly, which produces two very pleasing results.
Firstly, those increased earnings per share and returns on equity get built into the share price over time.
And secondly, the buyback itself acts as a sort of unofficial floor under the share price, with CSL taking a full year to pick up more than 13 million shares.
Both of these should provide significant returns for shareholders, given CSL doesn’t have the option of paying big, juicy franked dividends because its Australian tax base is so much smaller than its foreign tax bases.
Shareholders in CSL could effectively pay themselves a dividend by selling some stock into the buyback, particularly if they have some capital losses to write off any capital gains. The great thing about CSL is that its earnings are highly defensive and independent of economic conditions, given that most of its products are essential purchases.
CSL looks expensive on some Australian measures but if you compare it with similar global companies it is still playing catch-up, so my long-standing buy call is continued.
At the other end of the continuum is Biotron, a small biotechnology stock that has just launched a fully underwritten and heavily discounted rights issue to raise $4.1 million.
It should raise the funds in a canter given the latest clinical trial results for its main drug BIT225, which produced the stunning result of all trial participants being clear of hepatitis C after 48 weeks when combined with existing treatments.
That sort of result screams out for bigger and better clinical testing to see if this could be a “cure’’ for hep-C and that is precisely what Biotron is aiming to do.
With 180 million people in the world suffering from hep-C, a better treatment or cure would be wonderful and would be strongly supported by medical insurers as well as patients, given the high price of liver transplants.
If Biotron can get investigational new drug status before the US Food and Drug Administration — which it is aiming for — the value of the company should increase sharply.
There are plenty of risks but the earlier speculative buycall stands and shareholders should take up the rights.
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