Buy-back regret to dog Anglo forever

Boards and fund managers remain fans of share repurchasing

ANGLO American shares soared this week to almost R65, giving it a market capitalisation of nearly R82-billion. This puts it at less than half the value of the shares Anglo repurchased during the 2006-08 binge when, cash-flush from the commodity boom, it spent $10.85-billion buying back its own shares.

Ironically, now would be a better time to buy back Anglo shares, although this might be akin to catching a falling knife.

Of all the regrets Anglo must have since it relocated its primary listing to London in 1999, the decision to implement a massive buy-back programme must be one of its greatest.

In terms of lost opportunities it may not be as great as the decision to dispose of non-mining investments such as FNB and SAB, ironically a decision taken to enhance its standing with the London investment community in the hope of getting access to cheaper funding.

However, in terms of cost to the company, Anglo’s buy-back binge is up there with the ill- fated decision to develop the Minas-Rio iron ore project in Brazil.

But unlike the Minas-Rio project, which might someday recoup some of the investment if iron ore prices recover from their current lows, the $10.85billion spent on share repurchases is gone for good.

Without doubt the shareholders who benefited most from the repurchasing were those who sold out at prices (R540 at the peak of the repurchasing) that will never be seen again.

Around the same time, Telkom was also on a share-buying spree. It spent R5.15-billion buying 55.9 million of its shares be- tween 2004 and 2008. The company, which became dramatically smaller in 2009 when it sold its stake in Vodacom, currently has a market capitalisation of R33-billion.

It regularly announces costcutting exercises in a bid to secure the funds needed to pay dividends.

Construction company Aveng spent a fortune buying back its own shares around 2006-07 as the share price was peaking. The dramatic collapse in infrastructure development and the general decline in economic activity has seen the share price slump to levels that have pushed Aveng, formerly one of the coun- try’s major construction companies, into the small-cap index.

Research by Nicolene Wesson of the University of Stellenbosch Business School, released last year, also identified Sasol, MTN, Netcare, Remgro and Bidvest as big spenders on share buybacks during the pre-2010 bull market. None, of course, did as badly as Anglo.

Despite limited evidence of the long-term benefits of share repurchasing, corporate boards and institutional fund managers in South Africa remain enthusiastic supporters and regard it as an effective way to manage a company’s capital. (For investors one benefit of a buy- back is that management has less surplus cash to fritter away, although this didn’t stop the Minas-Rio splurge.)

The underlying presumption is that management would only buy back shares when circumstances meet the “Warren Buffett test” — that the shares are trading at a discount to the intrinsic value and the company has ample excess cash at hand.

The danger with establishing “intrinsic value” is that it relies on subjective judgments rather than accounting science, but chances are there will be little opportunity for buying discounts in a bull market. Companies determined to benefit from an “undervalued” share price would be better advised to buy into a bear market.

The limited information available on buy-backs by JSE-listed companies indicates it involves a few hundred billion rands a year. This is a very small frac- tion of the sums involved in the US, where buy-backs are sustained at high and increasing levels regardless of equity market conditions.

In the US, it seems, the “Warren Buffett test” has been discarded.

Such is their popularity in the world’s most powerful capital market that there is talk of the slow death of equities.

Dambisa Moyo, economist and director of SABMiller and Barclays, recently wrote about the troubling shift from equity to debt in global corporate funding as companies raise cheap and tax-efficient debt to fund share repurchases.

In doing so, they are replacing a long-term stable source of funds with a short-term unstable source. This will only add to the disturbing volatility currently facing the Anglos of this world.