Tim­ing, with hind­sight, can be wrong

Would money spent on share buy­backs have been bet­ter as a div­i­dend?

Finweek English Edition - - Companies & Markets - MARC HASEN­FUSS march@fin­week.co.za

THE SHAKE­DOWN in global mar­kets again gives in­vestors a chance to re­visit the de­bate about the mer­its of com­pany share buy­backs. On pa­per, they’re a mech­a­nism to en­hance value for share­hold­ers by re­duc­ing the pool of is­sued shares – which should, in turn, in­crease the earn­ings flow­ing through to share­hold­ers.

But not ev­ery­body whole­heart­edly sup­ports share buy­backs. A num­ber of pro­fes­sion­als be­lieve cap­i­tal used for such buy­backs would be bet­ter used in share­hold­ers’ hands – giv­ing them the choice of whether to buy more shares in a spe­cific com­pany or not.

It’s true direc­tors can’t al­ways time share re­pur­chases per­fectly (es­pe­cially in times of great mar­ket volatil­ity) and that un­fore­seen cor­po­rate or eco­nomic set­backs can ren­der a share buy­back pro­gramme a costly ex­er­cise. Some com­men­ta­tors also feel they aren’t re­ally ef­fec­tive as such ex­er­cises are of­ten used to counter the di­lut­ing ef­fects of ex­ec­u­tive share awards. In other words, ex­ec­u­tives – the re­cip­i­ents of share in­cen­tives – can em­bark on a share buy­back to pla­cate ex­ist­ing share­hold­ers’ con­cerns about di­lu­tion.

Still, over the past 12 months share­hold­ers may have taken com­fort in a listed com­pany reg­u­larly re-pur­chas­ing its shares on the open mar­ket. That, nat­u­rally, would sig­nal to in­vestors the par­tic­u­lar com­pany’s shares were con­sid­ered un­der­val­ued (or “good” value) by its direc­tors. But al­most without ex­cep­tion com­pa­nies that bought back shares over the past 12 months might be looking rue­fully at mar­ket events over the past few weeks when most share prices were rat­tled down in volatile trad­ing. If shares were deemed “cheap” six months ago then at cur­rent prices it would be tan­ta­mount to a fire sale.

In­ter­est­ingly, Oc­to­ber hasn’t seen a plethora of an­nounce­ments by listed com­pa­nies de­tail­ing share buy­backs on the open mar­ket – a time when shares may well be show­ing ex­cep­tional value.

An­glo Amer­i­can, one of the JSE’s big­gest list­ings, has re­pur­chased shares on the open mar­ket al­most on a daily ba­sis for the past two years. This year alone An­glo has spent £160m (around R2,5bn) in buy­ing back shares on the open mar­ket at prices markedly higher than the group’s cur­rent share price. An­glo doesn’t can­cel its re­pur­chased shares but holds the scrip in a trea­sury ac­count.

Looking through the sur­feit of Sens an­nounce­ments de­tail­ing share buy­backs – some at more than 3 000p (UK)/share – it’s dif­fi­cult not to see the ex­er­cise as any­thing but an ad hoc at­tempt to se­cure value for share­hold­ers and en­hanc­ing earn­ings.

The SA Share­hold­ers’ As­so­ci­a­tion chair­man reck­ons it’s un­fair to judge An­glo’s share buy­back ex­er­cise with the ben­e­fit of hind­sight. Still Sylvester con­cedes: “Ini­tially, they did look like clever bug­gers buy­ing back shares when An­g­los fell well off their high of more than R500. Right now – at th­ese prices – the buy back ex­er­cise looks less com­pelling…”

An­glo’s last foray into the mar­ket – at least at the time of writ­ing – was on 2 Oc­to­ber, when 50 000 shares were bought back at prices be­tween 1719p and 1858p/share.

Why An­glo hasn’t con­tin­ued its buy­back

Ini­tially, they did look like clever bug­gers buy­ing back shares when An­glo’s fell well

off their high.

pro­gramme with the shares cur­rently trad­ing at un­der 1550p on the Lon­don Stock Ex­change is puz­zling. Has the pre­vail­ing volatil­ity put its buy­backs on hold, with direc­tors per­haps reck­on­ing the share could go even lower?

Again, the eter­nal ques­tion is whether the cap­i­tal ex­pended on buy­backs wouldn’t have been put to bet­ter use in share­hold­ers’ pock­ets in the form of a div­i­dend or spe­cial dis­tri­bu­tion. That way, An­glo share­hold­ers could have per­haps been scoop­ing up shares on the open mar­ket at a point where the group seems ret­i­cent to re-pur­chase.

Fin­week asked An­glo whether funds mo­bilised for share buy­backs would per­haps not have been bet­ter utilised to pay a div­i­dend to share­hold­ers and whether share buy­back ex­er­cises would be in­ten­si­fied un­der cur­rent mar­ket cir­cum­stances.

An­glo spokesman Pramhill Ram­chan­der says the group has stated its US$4bn share buy­back pro­gramme will be ac­cel­er­at­ing. “The share buy­back forms part of our over­all cap­i­tal re­turn pro­gramme, which in­cludes div­i­dends. And that’s bal­anced by our re­quire­ments for in­vest­ment in the busi­ness and de­vel­op­ment projects.” Ram­chan­der says in the two-year pe­riod from March 2006 An­glo re­turned $12bn to share­hold­ers – in­clud­ing $1,5bn in spe­cial div­i­dends.

Per­haps a more star­tling ex­am­ple of an aw­fully timed share buy­back ex­er­cise was Old Mu­tual, which has slunk back on the

Lon­don Stock Ex­change and JSE on the back of spe­cific prob­lems in the US and the wide­spread fall­out world­wide in fi­nan­cial stocks.

Be­tween April and May this year Old Mu­tual bought back more than 10m shares at prices rang­ing be­tween 1700c and 1900c/ share. With Old Mu­tual now trundling along at un­der 1200c on the JSE the share buy­back ex­er­cise in April/May hardly seems like the op­ti­mal use of cap­i­tal. Since end-May this year Old Mu­tual hasn’t taken ad­van­tage of its markedly softer share price by buy­ing fur­ther shares in the open mar­ket.

With mar­ket giants An­glo and Old Mu­tual show­ing the best tim­ing for share buy­backs isn’t al­ways pos­si­ble, Fin­week would guess a num­ber of share­hold­ers in re­tailer Wool­worths would have paid at­ten­tion to an an­nounce­ment ear­lier this month. A large chunk of the pro­ceeds from the R2,25bn sale of a 50% stake in Wool­worths Fi­nan­cial Ser­vices to Absa will be mo­bilised (af­ter a spe­cial dis­tri­bu­tion of R750m) by Woolies for the pur­poses of a share buy­back “sub­ject to pre­vail­ing mar­ket con­di­tions at the time”.

At this del­i­cate time in the mar­kets per­haps Woolies should spend less time con­tem­plat­ing share buy­backs and rather leave that de­ci­sion to share­hold­ers by of­fer­ing more of the fi­nan­cial ser­vices’ pro­ceeds as a dis­tri­bu­tion.

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