I have no problems at all with using surplus cash to buyback...

I have no problems at all with using surplus cash to buyback shares. Where I do have a problem is CSL borrowing money to buyback shares, given its already high debt level.


@Old Engineer

Not sure how you arrive at the view of CSL having a "high debt level".

To truly appreciate CSL's degree of solvency, one needs to analyse CSL's capital balance:

It currently generates EBITDA of around $2.0bn pa.

To fund the growth in Sales requires an investment in Working Capital of around US$100m pa, leaving Net Receipts at around US$1.90bn.

Out of this comes Interest Payments of US$100m and Tax Payments of some US$350m.

That results in Operating Cash Flow of around US$1.45bn

The company typically invests around US$400m in capex, and a further US$80m to US$100m in the acquisition of Intangibles (read, Capitalised R&D)

So that leaves Free Cash Flow of a little under US$1.0bn which, when compared to the current level of Net Debt of US$2.6bn, means that the company could, if it wished, pay its debt off within about 30 months.

There are very few ASX-listed companies about which you could say that.

Given your concerns about the debt levels, presumably, if you were running the company you would apply the Free Cash Flows towards getting rid of the debt. That would not take very long (indeed, withing 12 months NIBD would be at a level below EBITDA), and then the question is, what then?



PS. If you are in any doubt as to the Surplus Capital generating potency of CSL, and the benefits of the application of that surplus capital to CSL buying back its own stock, then consider the following:

Subsequent to the Talecris deal not proceeding in 2009 (for which CSL raised some A$1.86bn in equity capital at $36.75/share in 2008), CSL has bought back around US$6.8bn in CSL, at share prices starting at ~$31.

CSL Share buybacks [Average share price paid in brackets]
FY2010: A$ 1,721 m [average price paid = $31.80]
FY2011: A$ 900 m [$33.90]
FY2012: US$ 650 m [$36.00]
FY2013: US$ 1,150 m [$57.70]
FY2014: US$ 830 m [$69.14]
FY2015: US$ 820 m [$89.70]
FY2016: US$ 650m [$93.70]


This program has, clearly, been a highly value-accretive thing to do.

An as a result, the issued share capital of the company has been reduced, quite impressively:

CSL Shares on Issue at June 30 balance dates [millions]:
FY2009: 599.2
FY2010: 549.7
FY2011: 524.8
FY2012: 506.9
FY2013: 487.4
FY2014: 474.8
FY2015: 464.8
FY2016: 454.6


Some of the more financially literate followers of CSL might immediately recognise that this 24% reduction in the issued share capital means that, shareholders who have held their shares over this review period, are today effectively entitled to 31%(!) more of CSL's profits than otherwise would have been the case.

And, as most will know, its not as if this $6.8bn of share buybacks has been to the detriment of the growth of the business.

Quite the opposite, in fact:

CSL NPAT During multi-year, US$6.0bn share buyback (all figures in US$m):
(Reported in US$ from FY2012, A$ figures until FY2011 converted to US$ equivalents)

FY2008: US$625 m
FY2009: US$825 m
FY2010: US$895 m
FY2011: US$931 m
FY2012: US$1,024 m
FY2013: US$1.211 m
FY2014: US$1.307 m
FY2015: US$1.379 m
FY2016: US$1.473 m (core business, excluding Novartis acquisition impact)


So what has happened is that profits have gone up (more than doubled, in fact), at the same time that Net Assets (i.e. Shareholder Equity) has gone down (by around 45%).

As a result, ROE has ballooned, from an already impressive 21% in FY2009 to close to 50% today.

There are very, very few businesses that can generate that sort of result.

And, has been demonstrated by an analysis of the company's capital balance, it is an eminently sustainable situation.