In Financial competency on 28/09/2015 at 1:09 pm
Here’s something interesting from Fidelty on the share buyback versus dividend debate. (Via FT):
The two are often treated as if they were the same thing, when there are quite different financial transactions.
Share buybacks are an acquisition of an asset, with a price to earnings multiple. They are not a risk-free investment, indeed they are very risky. A dividend is a long-term commitment to shareholders to distribute excess returns. It is not an acquisition.
Therefore, a company will attract very different shareholders depending upon which route it takes. Buybacks will attract activist and event-driven shareholders, while dividends will attract a more stable shareholder base.
Dominic Rossi is global chief investment officer of equities at Fidelity
In Corporate governance on 11/01/2012 at 5:38 am
Around 96 companies recorded 3,007 repurchases worth $1.059 billion in 201 according to the managing director, Asia Insider Limited, in his latest weekly BT column.”The number and value of transactions were second highest yearly totals since buybacks were introduced in June 1999, second only to the buybacks during the global recession in 2008.
‘The number and value of transactions in 2011 were sharply higher than the yearly averages of 1,281 trades and $526 million from 2000 to 2010. The heaviest buybacks occurred in the third quarter with 59 companies posting 895 transactions worth $455 million, which accounted for 61 per cent, 30 per cent, and 43 per cent, respectively, of the totals in 2011.
‘The most bullish sector in terms of value was transport with $276 million worth of repurchases in 2011. In terms of number of trades, property stocks recorded 739 transactions in 2011.”
As companies are supposed to buyback shares only when mgt believes that the market undervalues their shares, the following revelations are absurdly funny:
— “Only 15 out of the 96 [or 16 percent] listed firms that bought back shares recorded gains from their average buyback prices in 2011. The price gains ranged from 5 per cent to 61 per cent with an average increase of 13 per cent.”
— Some 60 firms or 63 per cent of the companies that bought back shares in 2011 saw their share prices drop by 5 per cent to 47 per cent from their average buyback prices with an average fall of 19 per cent.”
Not mgts’ money leh? Hence the failure to stop buback programmes in a bear market?
In Accounting, Corporate governance on 03/03/2010 at 5:20 am
Based on filings with SGX in the last week of February, “the buybacks among listed firms surged last week, after very low activity for three straight weeks. A total of six companies posted 17 repurchases worth $2.1 million. The number of transactions was more than the seven repurchases from Feb 1 to 19. Among the stocks that recorded significant buybacks last week were KTL Global, HTL International, and InnoTek”, reports BT.
The theory is that a company buys back its shares when it thinks the market is undervaluing the shares. But buying in a bear market can cause problems especially since bear markets can only be recognised in hindsight.
In a bear market, buybacks become a bad tool of creating shareholder value, and can cause management problems if they want to issue new shares to fund an investment.
One Warren Buffett said a few months ago, ” What we know with certainty, however, is that Kraft stock, at its current price of $27, is a very expensive “currency” to be used in an acquisition. In 2007, in fact, Kraft spent $3.6 billion to repurchase shares at about $33 per share, presumably because the directors and management thought the shares to be worth more.
‘Does the board now believe those purchases were a mistake and that Kraft’s true value is only the current price of $27 per share – and that it is therefore fine to structure a major acquisition based upon that price? Would the directors use stock as merger currency if the price were, say, $20 per share? Surely the true business value of what is given is as important as the true business value of what is received when an acquisition is being evaluated. We hope all shareholders will use this yardstick in deciding how to vote.”