Why I think South32 and 3 other ASX shares could be undervalued

Share buy-backs usually occur when a company's management team believe the shares are undervalued. Is this true for the South32 Ltd (ASX: S32) share price?

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Below is a list of four ASX companies which are currently undertaking an on-market share buy-back. Share buy-backs usually occur when a company's management team believe the company's shares are undervalued. This belief may or may not be correct, but it does make these 4 shares worthy of further investigation for this possibility. If these shares are truly undervalued, then they may have a compelling investment case.

What is a share buy-back?

An on-market share buy-back occurs when a listed company purchases its own shares via the open market. This can be financed with cash or debt. A share buy-back, like dividends, is a method of returning profits to shareholders.

4 companies that purchased back shares this week

South32 Ltd (ASX: S32) has been undergoing a share buy-back since as far back as March 2017.  South32 is a company which was spun off from BHP Group Ltd (ASX: BHP) and its share price currently sits at $3.22 per share. This is a decrease of almost 25% from its 52-week high.

BlueScope Steel Limited (ASX: BSL) announced its share buy-back in December 2018. The BSL share price currently sits at $11.68 per share which is only slightly higher than the share price at the time of the announcement. The highest price paid during this current buy-back is $15 per share.

Genworth Mortgage Insurance Australia (ASX: GMA) announced its plans for a share buy-back in February this year. The GMA share price currently sits at $2.95 per share which is above any price they have paid previously. GMA shares have risen more than 30% this calendar year.

ERM Power Ltd (ASX: EPW) announced its current share buy-back in February 2018 and it could continue into 2020. The current EPW share price is $1.84 per share and it has gained over 20% since the beginning of the share buy-back.

Foolish Takeaway

A share buy-back can be a tax-efficient way to reward shareholders and should only occur when a company's management team believe the company's shares are priced close to or below fair value. This makes them useful when looking for shares at attractive prices. A longer-term time frame is needed to ultimately determine if the management teams view, of undervaluation, is correct. Shareholders and investors should be mindful that this type of program will boost financial results on a per share basis and this, therefore, needs to be considered when analysing a company's performance.

Motley Fool contributor Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia has recommended ERM Power Limited. We Fools may not 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. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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