Why are investors worried about Whitehaven share buybacks?

Whitehaven's huge share buyback program might be in danger. Here's why.

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Normally, when an ASX 200 stock undertakes a share buyback program, it's a cause for celebration for shareholders. So, if a company, say Whitehaven Coal Ltd (ASX: WHC), threatens the existence of a popular buyback scheme, it's no surprise that investors might find it upsetting.

As many investors would be aware, share buybacks are, alongside dividend payments, one of the two major ways a company can return capital to its shareholders.

Rather than receiving a cash payment, as is the case with a dividend, share buybacks can boost shareholder returns without directly contributing to investors' taxable incomes.

How do buybacks work?

When a company undertakes a share buyback program, it buys back its own stock on the open market and permanently 'retires' the shares. This has the effect of reducing the overall pool of available shares. Under the laws of supply and demand, less supply equates to higher prices. This obviously benefits the company's existing shareholders.

One of the most prominent share buyback instigators in recent years has been Whitehaven Coal.

Whitehaven has brought in some of its best numbers ever over the past year or two thanks to record-high coal prices. The company has used these profits to shower shareholders with both massive dividends and ambitious share buybacks.

In its 2023 financial year report, Whitehaven revealed that over FY23, the company was able to pay out around $610 million in dividends over the year. That's in addition to just over $720 million in share buybacks.

Coal prices have come down this year but still remain elevated compared to long-term averages. But shareholders are reportedly still worried about this ASX 200 coal share's buybacks, and whether Whitehaven will keep them up.

According to reporting in the Australian Financial Review (AFR) this week, major Whitehaven shareholder Bell Rock Capital is accusing the company of "telling a select number of shareholders that it would delay its share buyback program".

Is the Whitehaven share buyback in danger?

Bell Rock is alleging Whitehaven's aspirations to buy two coking coal mines owned by BHP Group Ltd (ASX: BHP) would "result in a significant change for the company's capital management strategy and end what has been a generous buyback program for good".

BHP is seeking to offload its Blackwater and Daunia coking coal mines in Queensland and is reportedly asking around US$3.5 billion ($5.4 billion) in a potential sale.

Bell Rock Capital is alleging Whitehaven management told a private investors meeting the company would "'delay the share buyback program if it successfully acquired the two BHP mines, but immediately restart it if it did not".

Here's some of what Bell Rock's chief investment officer Michael O'Mara wrote in a letter to the Whitehaven board on the matter:

If our understanding of what was said … at the investor meeting is correct, Bell Rock is concerned that the market is misinformed as to whether or not [Whitehaven] is bidding for one or both mines and what implications this may have for the share buyback program…

In our view, if our understanding is correct, this information may have a material effect on the price or value of WHC's shares and should be disclosed immediately … if not disclosed, there is a material risk that a false market in [Whitehaven]'s shares is being created due to the uncertainty surrounding these media reports and selective disclosure about these matters that may have been made to some but not all shareholders.

Whitehaven has not commented on any of these rumours or allegations as yet. So it seems that at least one major Whitehaven investor has doubts about the company's share buyback program going forward.

It seems that for now, we'll have to wait and see if Whitehaven pursues BHP's coal mines to find out if the company will keep up its generous share buyback program.

Motley Fool contributor Sebastian Bowen 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 no position in any of the stocks mentioned. 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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