First, just to be clear, I haven’t followed the LLOY buyback(s) in any detail at all, but have followed closely other buybacks. The HSBA buyback I referred to previously was aggressive on price drops (within limits laid down) and started the day after it was announced as part of quarterly results. From that moment on the share price rose and there did seem to be a distinct correlation.
Your excellent attempts at analysis underlines the major problem with buybacks generally, imo. Their value is very difficult to assess and even if it distinctly helps raise the share price, the only way for a shareholder to cash in is to sell shares.
I find this particularly galling when companies such as GLEN proudly announce in their forward statement “It is intended to raise our return of cash to shareholders next year by a full $1bn to $5.2 Bn from $4.2Bn … $1bn of which shall be in the form of a share buyback”.
In other words, no rise in dividend. This is just one example of many I could give over the years.
I saw an analysis once on U.S. buybacks and around 9/10 saw no discernible advantage for the shareholder although some board directors bonuses based on EPS rose tremendously. I think most institutional investors no longer allow boards to get away with that particular dodge.
Within the analysis the only real correlation between various buybacks and obvious success (I.e a higher share price) was when buybacks were in excess of 5% of market cap. Less than that and the results weren’t really apparent. Those that did fail quite obviously were around 2.5% of market cap.
I can’t remember the details of it very well now, this was some years ago. These are one off buybacks which were the first fashion, not buybacks that are renewed each year as seems to be the current fashion these days.
Indeed one company I follow, NYSE:AGCO, has bought back 50% of its market cap in recent years, "we believe the stock is undervalued while we wait for the next Ag cycle upswing "
Check out the yield after years of buybacks that could have been dividends.
A company raises money on the stock market in an IPO and puts that capital to work intending to pay shareholders a dividend to reward them risking their capital. That’s the basic deal, right?
So, if a company finds it has so much cash it can no longer use it to attain that reasonable return for its shareholders, what is wrong with a special dividend to give the cash back? (Holders in NG may have a word or two to say on that).
@Bill1703 (I hope he’s well, haven’t seen him on these boards for ages) has an accounting argument about buybacks and how they benefit the balance sheet and overall value of the company over time. I must say I don’t really have enough of a technical accounting mind to follow it, although I’m sure he’s right in what he says. He knows his stuff.
When it comes down to it buybacks seem to be right on occasion for some companies, but they must have the flexibility to be aggressive when the price is lower and ease off at higher valuations. This is harder to achieve than it sounds because a third party has to given autonomy to conduct the buyback. BUT, surely someone has got these rules right at some point and they have been executed excellently (I.e raised the share price) and that bank or broker should have earned a name for itself, surely?
Afterall, its easy money - it is clearly all done by software which only has to be programmed once. Paying for someone to oversee that software is another down side to buybacks, but why not call in the acknowledged experts everytime?
Also, in the scenario where a buyback is apparently raising the share price as it was with the first HSBA one I mentioned (around 2015 possibly?) there comes a point as a shareholder where you have to bail out (sell shares) to cash in … as we followed it on the HSBA board (I’m sure @regardless remembers this) all the discussion was about "will the s.p. fall off a cliff once the buyback steroids disappear? Do I sell now or do you think they’ll announce a buyback extension at the next quarterly review?
Personally, I’d be happy to go back to the days when it was deemed illegal for a company to buy its own shares unless it had announced its intention to take the company entirely off the market.
I still have the same questions I asked the very first time I heard a buyback being announced:
If the company has run out of ideas so much that it can no longer employ my money to make a reasonable return why doesn’t it
a) just give me it back?
b) elect a new board with some fresh ideas?
c) isn’t announcing a buyback an admission that the company has now maximised its returns and size in its current business and isn’t that in itself going to depress the share price multiple the market currently allocates it?
I’ve still never really had a satisfactory answer (that I fully understand). What kind of company sees the best use of the capital on hand is to buy its own stock? Only if the board believe it is hugely undervalued should that ever be the case. Yet it it isn’t uncommon to see companies with huge debt buying back shares these days when surely paying down expensive debt would strengthen the balance sheet that much more and give better stability for future earnings?
Ok, rant over. Nice graphs, @Bowman. Good work.