Timing, with hindsight, can be wrong
Would money spent on share buybacks have been better as a dividend?
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.