Samsung share repurchase buys time for turnaround
Samsung Electronics' decision to return part of its enormous cash hoard to shareholders will buy the struggling company time with investors as it searches for new growth drivers, say analysts.
The company's stock rallied over 7 percent on Thursday as investors cheered the $2 billion share buyback plan, its first since 2007 and second-largest ever.
"They are in a tough spot, and in order to offset some of those concerns this buyback gives them that initial credibility with shareholders," said Bob O'Donnell, founder and chief analyst at Technalysis Research.
The doldrums
The South Korean tech giant is on track for its worst earnings performance since 2011 as profits at its mobile division collapses in the face of cut-throat competition in the smartphone market.
In the third quarter, Samsung's operating profit fell 60.1 percent on year to 4.1 trillion won ($3.90 billion), marking the weakest outturn since the second quarter of 2011.
Read MoreSamsung profit falls to more than 3-year lows
Over the past year, investor calls for higher returns have grown louder amid the company's flagging share price and growing war chest, which is estimated at around $60 billion.
"Samsung is imitating the American companies in how they are managing cash balances. You have a lot of U.S. tech companies with a lot of money who had thought of themselves as growth companies but are finding that they aren't growing anymore," said Roger Kay, president and founder at Endpoint Technologies Associates.
Apple is one such company that buys shares to return capital back to shareholders.
In April, the iPhone maker increased its share repurchase authorization to $90 billion from the $60 billion level announced last year. The company also increased its quarterly dividend by around 8 percent and split its stock 7-for-1 in June.
Action required
Samsung's decision may provide a boost to its share price, but ultimately the company must restructure its business for future growth, says Kay.
"Share buybacks are a kind of sleight of hand move because really there's no change in operations of the company at all. It's just a financial maneuver, which reduces the number of shares, increases the earnings per share and makes it appear that their earnings are somewhat better,"Kay said.
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Samsung needs to shed non-core businesses, and use that cash to start looking at investments that will drive growth over the longer-run, Kay added.
O'Donnell is optimistic that the company will be able to get back on track.
"They had a developer conference in San Francisco a couple of weeks back and we saw a side of Samsung that we hadn't seen before," he said.
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The company provided a vision of how they could be a pervasive player, not just in the mobile phones, but in the smart home space, he said. As part of this push, Samsung recently acquired SmartThings, a startup that allows people use a mobile app to control connected devices at home.
"[The vision] was pretty impressive – the general consensus [was] 'wow they are really getting it'."