FTSE Share buybacks on the increase

[vand]

As the Cranberries sang, Everyone Else Is Doing It So Why Can't We...?

Share buybacks - on the up massively in the last couple of years.

In my HYP of 24 stocks, 10 are now undergoing a buyback programme, of which 8 or 9 started since 2022. Only the Baccies have been on/off with their buyback programmes for longer.

We can discuss on the reasoning why - lots of Trusts keen to narrow their NAV discounts, but it seems that even amongst our established bluechips they are beginning to follow the US's lead in allocating capital for buybacks as well as ordinary dividends.

[AndrewInDevon]

Too much cash, too few investable opportunities, lack of risk appetite, better than giving taxable dividends, supports the share price so better for C -suite performance bonuses.

[stacker512]

Are buybacks bad for us, as investors?

[Gerry557]

Are buybacks bad for us, as investors?

Only if they overpay.

[Tedx]

Ol' Pyad wanted the cash himself so he could decide what shares to buy.

[vand]

Are buybacks bad for us, as investors?

Only if they overpay.

Yeah, there'a big difference between a cheap Baccy company engaging in buyback and a highly valued US tech company doing so. If anything if your stock is richly valued you should be taking advantage the other way and issuing new share capital.

[GoSeigen]

Are buybacks bad for us, as investors?

Only if they underpay.

GS

[daveh]

Are buybacks bad for us, as investors?

I was writing this earlier, but got delayed as I had to go and do some work:


It depends.

If the shares are undervalued it can be a good use of excess money, like buying £1 coins for 75p. It will reduce the share count and means profits and (future) dividends are spread over fewer shares - so could lead to a better dividend (per share) in the future. It will also mean that you, the shareholder, owns a larger % of the company.

The big ifs are 1) are the shares really undervalued? Because if not then buying back shares is a bad idea for you the shareholder (but may be good for the directors as it makes bonus targets such eps easier to achieve). 2) Are they actually using excess cash to do the buybacks or using debt. If its the later then not such a good idea.

An example of where I think share buybacks are or could be good are the green infrastructure ITs such as TRIG, UKW, GSF, GRID etc. These are sitting at large discounts to calculated NAV of between 60-20% so if they have cash not needed for building out their assets buying back shares at such large discounts to NAV should be very good for remaining shareholders

[GoSeigen]

Are buybacks bad for us, as investors?

Only if they underpay.

An explanation.

The conventional wisdom among small retail investors, talking heads, financial journalists and surprisingly many sell-side people is that buybacks are bad if the price is "high" (generally expressed as above book value) and vice versa.

I take a different view. The primary reason for the contrasting position is that in my judgement the shareholders of a company should be considered as an entire class from which the individual is indivisible. The company is there to serve all the shareholders, not just a subset (the hodlers). As such its duty is to raise capital from the shareholders and then increase the value of that capital and the income generated for the shareholders. When the company no longer has use for the capital it should be returned to the shareholders at a higher price than when it was raised. (This is a general principle, of course as with bonds if the income is very high then capital value may decline.) The point is shareholders don't want their capital returned to them on the cheap, they want to sell at as high a price as possible.

So what about buybacks? As an individual you do not have to hold your shares forever! I know this is heresy for some but believe they are mistaken. If it's good for shareholders as a class to be receiving their capital back, than why should I as an individual not participate in that? And even if I don't, it's a fact that the capital of the company after a buyback is diminished even if I haven't sold any of my own shares. By not participating and holding all my shares I am choosing to increase my exposure to future outcomes of the company. Again that is simply a fact. If the company continues to perform I will receive a greater share of the returns. If it struggles I'll bear more of the downside. This is not true of the shareholders as a whole: there are fewer of them now, the ones who "got out" will no longer participate in the fortunes of the company (or with a smaller exposure).

It's odd that the people who criticise buybacks are often the same ones who love dividends. But the effect on the company is really not much different in the two cases. The same amount of cash goes out the door. The key difference is in the distribution of the funds: dividends got to all shareholders whether they want them or not. Buybacks only return money to those willing to dispose of shares.

My attitude to buybacks is that they require of me a decision: do I participate or don't I. If not I am consciously accepting an increase in my exposure to the business. I can only do that if I am bullish about its future prospects. These days I often sell a few shares in companies with buybacks, thus participating in the return of capital. I'm happy to participate along with the entire class of shareholders. Then there is no regret really. If the company struggles I have lower exposure. If it continues to thrive I still have the remainder of my shareholding.

It's an attitude that lets me sleep at night and peacefully accept what is happening. I believe it is also a much sounder way of viewing investment and allows me to make better investing decisions.


GS

[Gerry557]

GoSeigen thanks for the explanation.

"Buybacks only return money to those willing to dispose of shares."

Im not sure I agree with that. Normally Im against buybacks only because the board might be ok at running a company but tend to be poor at being investment managers. Often instigating a buyback at a high price. I tend to prefer to be given the cash so I can choose when to buy more shares myself or not.

If done at a discount to NAV the remaining holders will be better off. The "looser" is the shareholder who decided they no longer wanted to be. Of course they might be a winner too if they paid a lower share price. You dont have to sell but if no one was selling then the share price would probably be doing something different.

A simple 10 share company that buys back one share. Normally NAV is 10. How does that affect the remaining 9 share holders if the buyback is done at 0.5 compared to one at 1.5. it has a divi of one too.

I think Rolls Royce did buybacks at a tenner or seven pound but then later had to do a placing at 32p. This is probably an extreme but the examples above is probably an occasion where I might agree with the buyback

[GoSeigen]

GoSeigen thanks for the explanation.

"Buybacks only return money to those willing to dispose of shares."

Im not sure I agree with that. [...]

We might be at cross purposes. I was making the straightforward point that with a buyback the shares are not bought equally from each holder, they come from the subgroup of shareholders who choose to reduce their holding at that time. Obviously if you are a "never sell" investor then you don't receive any of the distribution whereas you'd have received part of an equivalently-sized dividend.

ISTM that these are self-evident facts that no-one could dispute [EDIT: so yes perhaps I was stating the obvious..].


GS

[vand]

There are good reasons to be very skeptical of buybacks when the shareprice seems high.

As an example, Burberry bought back £400m of shares between Nov 2022 - Sept 2023 at a price of 2243p. Today, less than a year after completion of the programme the share price sits 60% below the price at which they bought back the shares... it's one of those classic demonstrations of boardroom hubris.

[dealtn]

GoSeigen thanks for the explanation.

"Buybacks only return money to those willing to dispose of shares."

Im not sure I agree with that. [...]

We might be at cross purposes. I was making the straightforward point that with a buyback the shares are not bought equally from each holder, they come from the subgroup of shareholders who choose to reduce their holding at that time. Obviously if you are a "never sell" investor then you don't receive any of the distribution whereas you'd have received part of an equivalently-sized dividend.

ISTM that these are self-evident facts that no-one could dispute [EDIT: so yes perhaps I was stating the obvious..].


GS

Yes, but except in relatively rare circumstances, those same shareholders, wishing to sell, can do so in the market at any time, and aren't reliant on waiting for the company to launch a buyback programme.

[GoSeigen]

We might be at cross purposes. I was making the straightforward point that with a buyback the shares are not bought equally from each holder, they come from the subgroup of shareholders who choose to reduce their holding at that time. Obviously if you are a "never sell" investor then you don't receive any of the distribution whereas you'd have received part of an equivalently-sized dividend.

ISTM that these are self-evident facts that no-one could dispute [EDIT: so yes perhaps I was stating the obvious..].


GS

Yes, but except in relatively rare circumstances, those same shareholders, wishing to sell, can do so in the market at any time, and aren't reliant on waiting for the company to launch a buyback programme.

You are referring to individual shareholders. I am thinking of shareholders as a class. It is a fact that after the buybacks fewer shares are held by the shareholders. This is NOT the case in the usually prevailing circumstance when the secondary market is operating without buybacks -- during which the number of shares held by shareholders is constant.

[EDIT: Also of course, in the secondary market distribution of company funds is not occurring whereas in a buyback it is.]

GS

[Gerry557]

I'm still not sure what point you are getting at.

With a buyback, done below actual value then all shareholders are better off. Those that have sold are no longer shareholders.

They chose and were happy to be paid, to no longer be shareholders.

If the buyback occurs above value, then all remaining shareholders are worse off and the sellers are still happy.

If no one agrees to sell, we'll I expect the Share price will rise until someone is tempted.

Personally I like companies just to return me cash so I can decide to reinvest or buy something else as often they get the buyback wrong. Although I can decide to take my time and wait for the right opportunity to strike. Where as a buyback tends to be done over several months or even years without actually knowing what the share prices are going to be.

[Lootman]

I'm still not sure what point you are getting at.

With a buyback, done below actual value then all shareholders are better off. Those that have sold are no longer shareholders.

They chose and were happy to be paid, to no longer be shareholders.

If the buyback occurs above value, then all remaining shareholders are worse off and the sellers are still happy.

If no one agrees to sell, we'll I expect the Share price will rise until someone is tempted.

Personally I like companies just to return me cash so I can decide to reinvest or buy something else as often they get the buyback wrong. Although I can decide to take my time and wait for the right opportunity to strike. Where as a buyback tends to be done over several months or even years without actually knowing what the share prices are going to be.

But "returning cash" is a taxable event whilst buybacks are not. And a lot of investors do not want involuntary tax events.

As for whether a buy back is above or below "actual value" that depends on you knowing what this actual value thing is. That implies you know the "real" value of a share when in reality all you know is the current market price. Everything else is an opinion.

I like buybacks because they are generally done from a position of strength e.g. the company having a lot of cash. The opposite to me is something like a rights issue where the company is typically short of cash and wants investors to put in more, i.e. it is done from a position of weakness.

I am less keen on buybacks if it is pure financial engineering e.g. when a company borrows money to buy back stock. That is the kind of leverage typically seen in private equity deals and if I wanted that I would invest in PE. But otherwise I would rather have buybacks than special dividends. I can always sell some shares if I want cash, but at a time of my choosing.

[GoSeigen]

I'm still not sure what point you are getting at.

That the response to a buyback is the personal responsibility of the shareholder who has a choice what to do. I suppose moaning about it is a choice but not nearly as useful as deciding to sell if unhappy with the buyback price. I know this is difficult for people who have vowed never to sell.

I suspect from what you wrote next that we largely agree about this.

With a buyback, done below actual value then all shareholders are better off. Those that have sold are no longer shareholders.

They chose and were happy to be paid, to no longer be shareholders.

If the buyback occurs above value, then all remaining shareholders are worse off and the sellers are still happy.

If no one agrees to sell, we'll I expect the Share price will rise until someone is tempted.

Personally I like companies just to return me cash so I can decide to reinvest or buy something else as often they get the buyback wrong. Although I can decide to take my time and wait for the right opportunity to strike. Where as a buyback tends to be done over several months or even years without actually knowing what the share prices are going to be.

True, dividends force the choice on shareholders. They are given back a piece of the company and have to decide what to do with their cash. Payment of dividends is clearly very popular and possibly preferred by most investors -- which governments have also noticed and discovered is a good source of tax revenue!


GS

[kempiejon]

True, dividends force the choice on shareholders. They are given back a piece of the company and have to decide what to do with their cash. Payment of dividends is clearly very popular and possibly preferred by most investors -- which governments have also noticed and discovered is a good source of tax revenue!


GS

I found, the change of treatment of dividends has changed the way I invest. When unsheltered dividends were excused tax to zero and BR paying coves they were my weapon of choice for recurring income. Changes in regime have changed my investing priority, growth can be unsheltered. Dividends, much like PIDs from REITS, better in SIPP/ISA. I'm not letting the tax tail wag the investment dog but why pay tax if I don't have to; by refining my choices, a bit of careful annual selling now gains limits have reduced to make full use of allowances I have been able to mitigate my tax liability from investments. For now...

Buy backs are not new and I'm fairly agnostic about them, like other decisions my directors take, some look useful or risky, some my be vanity or are self serving but probably it's an accounting good idea in lieu of anything better and doesn't drive my investing decisions. I don't make an investment case, or not, for picking companies engaged in buybacks, or not.