What about South32’s share buy-back?

Finweek English Edition - - In Depth -

Another com­pany fol­low­ing the method­ol­ogy of Rand­gold Re­sources by not div­ing into cor­po­rate ac­tiv­ity in favour of de­vel­op­ing its own re­sources is South32, the com­pany cre­ated from the de­merger of non-core as­sets of BHP.

Asked by fin­week in Au­gust why the com­pany was rel­a­tively un­spec­tac­u­lar in its ap­proach to growth, South32 CEO, Gra­ham Kerr, said: “We are what we are.” In other words, the com­pany had set out its stall to con­ser­va­tively man­age its cash, which seems ap­pro­pri­ate for a firm born in the midst of the met­als price cor­rec­tion of the past few years.

Its de­ci­sion, how­ever, to im­ple­ment a share buy-back pro­gramme – which in Au­gust it ex­tended by $250m to $750m – has both its fans and its crit­ics. In essence, a share buy-back pro­gramme is how a com­pany in­vests in it­self and its own as­sets. The buy-back not only boosts the value of the out­stand­ing shares but it also in­creases the earn­ings per share when the com­pany an­nounces fi­nan­cial re­sults.

Some don’t like it though. South32 may ar­gue it is serv­ing the needs of en­dur­ing share­hold­ers, whereas other in­vestors would rather have cash paid out to them so they can make the de­ci­sion on whether to con­tinue buy­ing the shares or di­ver­sify into other stocks. “Share buy-backs are al­ways a bad idea un­less you can do it at the bot­tom of the cy­cle [when the share is most un­der­vauled],” said Henk Groe­newald of Corona­tion As­set Man­agers.

“They al­ways take place at ex­actly the wrong time; when the com­pany has ex­cess cash on the bal­ance sheet and quite of­ten when they ben­e­fit di­rec­tor in­cen­tives [on share price per­for­mance],” said Jim Ruther­ford, a non-ex­ec­u­tive di­rec­tor of An­glo Amer­i­can. “But let’s not go there,” he added.

Mike Fraser, chief op­er­at­ing of­fi­cer of South32’s South­ern Africa as­sets, com­mented: “Ob­vi­ously, share­hold­ers like div­i­dends be­cause they can de­cide what to do with it.

“But the prob­lem is that from a value point of view, pay­ing out div­i­dends doesn’t in­crease the over­all value of the busi­ness. It might in­crease the value for the share­holder today who has that ben­e­fit, but it does not in­crease the long-term value of the com­pany,” he said.

As for the sus­pi­cion that share buy-backs are only in­tended to boost the value of the share and en­able di­rec­tors to meet their own fi­nan­cial in­cen­tives, Fraser said the cri­te­ria of to­tal share­holder re­turn – on which South32 bonuses are based – also in­cludes div­i­dend pay­ments. Ei­ther way, it pays the com­pany’s of­fi­cers to pro­vide re­turns to share­hold­ers. But the is­sue of share buy-backs would ap­pear to be a moot one.

“Some share­hold­ers ask us to do our cap­i­tal man­age­ment through share buy-backs be­cause, ul­ti­mately, if you are a long-term share­holder you want to see that ap­pre­ci­a­tion in the share price. Oth­ers are much more in­come fo­cused and that’s why they want div­i­dends.

“So if you look at our to­tal share­holder base, there’s a whole mix of share­hold­ers, from value funds to in­come in­vestors and try­ing to sat­isfy all of them means that there isn’t one sce­nario that al­ways plays out,” he said.

“Share buy­backs are al­ways a bad idea un­less you can do it at the bot­tom of the cy­cle.”

Mike Fraser Chief op­er­at­ing of­fi­cer of South32’s South­ern Africa as­sets

Gra­ham Kerr CEO of South32

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