Everything you need to know about the latest A2 Milk share buyback

A2 Milk is buying its own shares back. Here's what that means…

Sebastian Bowen

Author Bio Sebastian Bowen has been a Motley Fool contributor since late 2018. Sebastian found his passion for writing and educating others about shares and all things finance after completing his studies in political, economic and social science and enjoys bringing this passion to life at the Fool. His investment philosophy is a simple one – buying high-quality companies at prices that make sense. When he’s not researching his next investment at all hours of the morning, Sebastian enjoys classic movies and likes to unwind with a good book, newspaper or record. Areas of Expertise Dividend investing ETFs Education Bachelor of Political, Economic, and Social Sciences (Government and International Relations), University of Sydney Social Media X/Twitter Favorite Investment Quote "In the short run, the market is a voting machine, but in the long run, it is a weighing machine." – Benjamin Graham

Published August 29, 2022 1:31 pm AEST

The S&P/ASX 200 Index (ASX: XJO) is having a dreadful start to the trading week so far this Monday. As it currently stands, the ASX 200 has lost a painful 2.07% and is back around 6,950 points. But the A2 Milk Company Ltd (ASX: A2M) share price is a conspicuous outlier.

A2 Milk shares are comprehensively defying the gloom on the markets today. The ASX 200 dairy share is currently up a healthy 9.06% at $5.355 a share. This move comes after A2 Milk reported its FY22 full-year earnings to the markets this morning.

As we went through at the time, these earnings saw A2 Milk report a pleasing 19.8% rise in revenues to NZ$1.45 billion. Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) rose an even better 59% to NZ$196.2 million. Meanwhile, net profit after tax (NPAT) was up 42.3% to NZ$114.7 million.

But perhaps the biggest piece of news this morning was the announcement that A2 Milk would initiate a NZ$150 million ($133.65 million) on-market share buyback program.

A man in a business suit holds a mobile phone to his ear while he drinks a large glass of milk. — Image source: Getty Images

Are share buybacks boosting the A2 Milk share price today?

A2 Milk's managing director and CEO David Bortolussi said that "our on-market buyback of up to NZ$150 million demonstrates effective capital management and the improved confidence we have in our strategy, execution and outlook".

This might be part of what is delighting investors today with this report.

Share buybacks, like dividends, are a form of capital return for shareholders. A buyback involves the company buying its own shares on the open market and 'retiring' them. This has the effect of reducing the supply of the shares. This, under the laws of supply and demand, should result in share price appreciation.

Further, buybacks reduce the overall share count for a company. As such, they are usually accretive to earnings per share (EPS) growth, seeing as there are fewer shares to divide a company's earnings between.

Many investors (including the legendary Warren Buffett) prefer buybacks to dividends, seeing as the positive effects of share buybacks can be enjoyed without being initially taxed, unlike a dividend. So it's perhaps no surprise that the A2 Milk share price is performing so well today.

At the current A2 Milk share price, this ASX 200 dairy share has a market capitalisation of $3.97 billion.

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