There was no hiding behind a $US200 million share buyback yesterday for international building products group James Hardie as it sliced its 2022-23 earnings guidance for a third time in as many quarters.
Down went the shares on that news, losing more than 13% as investors punished the company.
The shares ended the day at $28.81, the lowest they have been for more than two years as the market didn’t buy the new idea that James Hardie was now a growth stock and therefore would reward shareholders through buybacks and not dividends.
For the six months ended September, the company reported a 14% increase in sales to $US1.998.5 billion and a 22% jump in net profit to $US330.5 million.
While seeming a solid interim result, its sales and profit growth slowed from 19% and 34%, respectively, in the company’s first quarter (to June 30).
That slowing was due to a downturn in its key markets and behind the slicing of the earnings forecast for 2022-23 – originally estimated in a range of $US740 to $US820 million, it was trimmed after the June quarter results were released to $US730 to US780 million – a hefty cut at the top of the range.
Then yesterday the slicer was out again, lopping the range to $US650 million to $US710 million, which is a long way below the original range.
In fact at the bottom of the range the March, 2023 estimate isn’t all that far away from the $US620.7 million reported for the year to March 31, 2022.
The company noted that over the past 45 days it had seen a significant change to the outlook of housing market activity for the second half. As a result, management has downgraded its guidance for FY 2023. It explained:
“Based on the challenging macro-economic conditions, and housing market uncertainty, management has adjusted the fiscal year 2023 Adjusted Net Income guidance range.
“The updated 2023 Adjusted Net Income guidance range is US$650 million to US$710 million, changed from the prior range of US$730 million and US$780 million, due to a decline in volume expectations. The comparable prior year Adjusted Net Income for fiscal year 2022 was US$620.7 million.”
And on top of this, the dividend has been scrapped and will be paid via the $US200 million share buyback (around $A307 million).
That will see the company using the money that could have been paid to shareholders as a dividend, supporting the shares in what looks like being a rough year ahead.
That in itself should be a big warning sign to investors that a global company operating in an industry that is very sensible to interest rates as home building is, has moved to hunker down and keep as much cash as possible by abandoning its dividend and going to a share buyback to keep as much cash inside the company as possible.
The buyback means there will not be dividends for the rest of the year till next October.
Hardies, though, preferred to pitch the move in a more market friendly fashion – it sees itself as a ‘growth’ stock.
James Hardie CFO, Jason Miele, explained in the statement
“Today we adjusted our Capital Allocation Framework to better match who we are: a growth company. The number one and primary focus of our Capital Allocation Framework is to invest in organic growth; our 5-year average Adjusted ROCE (Return on Capital Employed) of 36% is proof that investing in our growth should be our number one use of capital.”
“Returning excess capital to shareholders via a share buyback rather than a dividend provides a growth company the optimal flexibility to ensure investment in organic growth is prioritized while maintaining financial strength and flexibility through cycles. Through these cycles we will target an average leverage ratio below 2.0x (times).
“Finally, today, we announce the replacement of our unfranked ordinary dividend with a share buyback program, which was approved by our Board of Directors for an amount up to US$200 million from today through 31 October 2023.”
That’s handy a buyback for a year to limit the cash outflow to shareholders according to how far the board wants to support the share price.
The absence of franking has meant the company’s shares are not attractive to many Australian investors looking for tax free income. Hardie shares are in effect a high tax investment.
