I thought that this article might be of interest to some of the posters here who question share buybacks.
FTSE350 average £15b to £20b from 2007 to 2017 and Lloyd’s managed £1.5b last year.
To say Lloyd’s buyback was 10% would be unfair as not considering inflation over that early period (not sure on inflation figures) but it still seems a really large portion considering they are a small percentage of the ftse350 valuation.
I still say it’s a bit much but what do I know.
Well, the article is behind the pay wall, but the first paragraph pretty much sums it up for me …
“In typically overblown language, they have been labelled “corporate cocaine”. Share buybacks – the act of companies purchasing their own shares, typically using excess cash – has been “ringing alarm bells” for commentators for years.”
What business has ‘excess cash’? Isn’t that a euphemism for larger than expected profits?
If so, what is wrong with handing that back to the shareholders who have invested in the company in that expectation?
The last time I looked one only has to register with the Telegraph and get an account. Then one can access a certain number of articles for free each week, but after that one has to subscribe; at least that was how it used to be - they may have changed it.
Unfortunately one needs to actually read the whole article to understand what the author is trying to say. The last paragraph of the article states
In that light, this research is an extraordinarily important corrective. There is no evidence from the UK that share buybacks reduce companies’ investment or are used as a means of enriching their executives. Any anti-corporate conspiracy bandwagon must roll on to a new site.
Is there any evidence in this research that buybacks help shareholder’s wealth? If so, how? Is this in any way measured against special dividend cash in their own pocket to decide to do with as they want?
I’ve never heard the argument that buybacks reduce investment.
The very act of a buyback suggests that the company has no more investing worth doing, surely? That is what I hear over and over from shareholders when it comes to buybacks, and it seems a very reasonable argument - especially if the company is buying back at an historically high market price.
This was not the target of the research being quoted. The effect of a buyback on a Company’s share price depends on the individual Company and how the buyback is perceived; there is no uniform effect since the share price is the result of market opinion not a mathematical formula.
Conversely, there is no evidence that a buyback does not help shareholder’s wealth.
However, from a mathematical point of view, a buyback will result directly in an increased dividend should all other factors remain the same (which of course they never do!). Should market perception of the share price level be based solely on the dividend yield then this would subsequently result in a higher share price.
A special dividend in one year followed by no special dividend in the next year tends to be seen as a negative because it is construed as a dividend cut. This negative effect is not necessarily there when a share buyback is not repeated or continued.
The whole aspect of share buybacks versus special dividends or just retaining cash is a very complex area where it is almost impossible to come to a clear conclusion on what is better for the long-term profitability of the particular Company concerned.
Why restrict this to buybacks? A high dividend payout can also be perceived in the same light, since a dividend payout is extracting capital from a Company that could otherwise be better used investing in growing the Company.
I don’t agree with that actually, that is the whole point of a special dividend. It should NOT be seen as part of the standard sequence of dividend payments - nor have I seen any evidence of special dividends being taken as a negative when not repeated a year later. NG,. I suppose, but that was a genuine part sale of the business and return of capital to shareholders and cancellation of shares (I forget the correct technical term for it). It has been an unmitigated disaster, by the way.
And that is why I asked the above question. Because buybacks and dividends are often now discussed as “return of value to shareholders” and within that phrase are synonymous. In fact, as holders we all know that they are entirely different.
Also, I have to say I disagree with your analysis of a buyback pushing up the dividend automatically. (Sorry to be so contrary, I’m not trying to pick an argument). That all depends on what the dividend policy is for the particular company. Very, very few companies (none I can immediately think of) base their dividend policy on some formulae based on the number of shares in circulation.
No, they sometimes have a formulaic policy, ANTO, GLEN are obvious examples, but the formula leads to a figure which is then divided by shares in circulation. Then, if that figure results in too high an annual rise unlikely to be sustainable, or a cut which will be negatively perceived, they adjust the amount to suit.
Most other companies make no pretence and just slightly increase the dividend per share from last year. A buyback could then result in LESS actually being paid out by the company.
It is true to say there is no evidence either way about buybacks helping or damaging a shareholders wealth and that is the main argument against them. How does one tell if they are actually a good idea? This is especially a serious question when boards are talking about ‘return of value to shareholders’. In many other professions, such a statement might well amount to false advertising.
I said if everything else remained the same. The dividend payout was a specific sum of money to be returned to shareholders, which when divided by the number of shares in issue yields the dividend per share figure that determines what an individual shareholder gets. The dividend policy determines the pool of money available to be distributed, it does not start with a defined dps level. This pool of money can be based on that year’s profit or can include retained reserves from previous years.
If the Company decides that this pool of money to be returned to shareholders is to remain the same (either because the profit has remained the same, the proportion to be returned is changed, or existing cash reserves are to be distributed), and in the mean time has managed to reduce the number of share in issue, then the dividend per share goes up. This means that a shareholder with the same number of shares as previously will get an increased payout.
Of course , also in the meantime the share price may have changed, but this does not have anything to do with the dps level directly, in fact the dps change can affect the share price, but the share price does not affect the dps. Similarly the annual profit made will tend to affect the share price, but the share price does not affect the profit made.
I disagree. A buyback will only result in less being paid out if the dividend is cut. Usually the dividend is determined first, and then what is left goes towards the buyback. One of the main arguments made against a buyback is that the dividend could have been increased.
As I said this whole area is subject to a great number of interacting influences where it is extremely difficult (usually) to determine what is affecting what. The fact that the discussions surrounding buybacks continue to rage is because it is difficult to match all the conflicting views and to categorically prove or disprove one side’s case, hence it is a matter of opinion making a claim of falsity impossible to prove.
Not all buybacks are because a company can’t think of how to reinvest the cash. Microsoft and Apple have had huge buybacks while still having momentum growth, serious investment and (modest) dividend advances. It is another way of improving the outlook, a bit like paying down debt on the balance sheet.
Take Plus500 … debt free, lots of surplus cashflow and a very volatile performance, sp very cheap when the spare cash is not being thrown off in a special. Still investing lots in new markets and new customers. Also starting to issue new shares to execs while former execs/founders are being boought out … so there are quite a few reasons why you would do a buyback.
The very best reason is to buyback when the shares are dirt cheap … a bit like those ITs which have the discretion to buyback when the discount is wide and to issue new shares when trading at a premium.
That was not what LLOY were up to … they were just trying to reverse the long term problems being caused by excessive new stock issues for whatever reason and at whatever price.
Some buybacks are suspiciously sold as shareholder returns but turn out to be to cover up something. At LLOY it seems to be about negating the issue of shares to staff. At Berkeley Group I am suspicious it may have something to do with the large disposals the senior exec have made and want to make as they are at the end of the careers.
LLOY of course have much better uses for its free cash. Paying for its misconduct. Overpaying its execs.
OK you caught me at a bad time!
If the board are convinced that the stock is being badly undervalued by the market and state that as a reason to start a buyback programme, I have always supported that as a worthy example of when a buyback is a positive - assuming board members aren’t on bonuses based on EPS.
I think those scams quickly died out in the early days of the buyback phenomenon and most institutional shareholders would spot them now if attempted.
Had the bonus shares not been issued but had been purchased in the market, then the Company would have had to pay the going market rate at the time, which would have removed capital from the Company, which in turn would have meant that there was less money to pay as dividends (or used for other investment purposes).
With good hindsight, the price paid during the buyback was lower than it would have been had the shares been bought in the market at the time, so actually the buyback has been good value for money.
Similarly, had the remuneration of all those receiving bonus shares been defined as a fixed monetary amount, irrespective of what they did or achieved, or how the Company performed, then the resulting remuneration would have been significantly higher, again removing capital from the Company and reducing the amount available for dividends. Look back over the past 10 years (it is all in the Annual Reports available on the LLOY website) and you will see that the bonus shares were not allocated in full, hence the remuneration has been lower than it could have been.
The number of bonus shares issued is almost insignificant when compared with the number issued for corporate and investment purposes and to cover the HMG bailout(s) about 10 years ago. Again hindsight is a wonderful thing, and the HBOS merger does appear to have been a mistake, however, LLOY was hardly in the best of health at the time, and in all probability would have required a HMG bailout anyway.
LLOY had slumped to a MCap of only £7.5bn in 2009 before the HBOS merger was done, but currently has a MCap of ~£36bn. Also I am unaware that having a large share base is causing problems for the Company.
Well, yes. In such a case that would be correct. Can you name any company that actually operates such a policy though?
I can think of one, but that is a very special case indeed. It is supposed to be yielding 17.5%, as a shareholder I have to say how many shares I want to sell at the price they have proposed to buyback at. Depending on all shareholder responses you then get your allocation or not.
I bought more shares in the open market during the process, asked for them to buy 100%, they allocated 71.5% and I made 55% (110% annualised yield) from the process after selling my remaining 28.5% stock in the open market at a lower price. I hope to do similar again soon when the next buyback is announced. (This transaction is posted live elsewhere - read by some who read this board also).
Hardly the straightforward process you illustrate - although I realise you are simplifying for the sake of explanation.
It is entirely possible in the more realistic scenario of a dividend being declared as an amount per share that the total buyback amount can be less even with a rise in dividend payment.
If the divi is declared as 1pps and there are 100m shares, then the amount paid out is £1,000,000
Next year after 5% of market cap has been bought back there are 95m shares. Dividend is declared at 1.03pps (a 3% rise) and the amount paid out is £978,500.
Hence the dividend has risen and the amount paid out is less, in a perfectly plausible scenario.
Well, how about Lloyds Banking Group. Page 140 of the Annual report defines the dividend policy, and the amount of dividend depends on the available distributable reserves, which at 31 December 2018 amounted to approximately £8.5 billion. The Directors then decide how this sum is to be used, and for 2018 they decided to distribute £1.523bn as a final dividend (having already distributed £765m as an interim dividend), and use £1.75bn for a share buyback.
Another example is JPGI, an investment trust, which sets its dividend as at least 4% of the NAV.
Virtually all Companies issuing a dividend first determine how much is available to be distributed and then decide what proportion is to be used or retained, before deciding the method of distribution.
I do not understand the relevance of the example you gave to the effect of a market buyback on the dividend, which is actually very simple. If the amount to be distributed stays the same then a reduction in the number of shares resulting from a buyback will result in an increased in the dps. An individual shareholder does not have to dispose of any of their holding to get the increase in the dividend.
The example I gave was the only example I know of where the amount to be distributed is the same each year. In that particular case you are obliged to sell shares to get anything back, a process which requires you to take part in a tender offer. The vast majority said they wanted to sell zero shares which is why I ended up with such a large allocation. That majority got nothing from the buyback, not even any growth in the share price despite the fact the same amount will be up again for distribution soon.
They called this, by the way, a ‘return of value to shareholders’ long before we were ever told it would be a buyback only (no dividend), although I had recognised the phrase and was not surprised when a buyback only was announced.
The examples you give of LLOY and JPGI are typical examples where there is no fixed amount, they are effectively parameters for the board from which to choose a dividend per share, in my estimation, which results in a dividend declaration in pence per share which they hope to graduate each year. (Let’s not get into interims for the sake of this discussion).
Earlier, I said the very act of a buyback suggests the company has no more investing worth doing. You asked me the question …
My answer to that is that the implicit contract between a company and a shareholder, especially a company so long established as LLOY, is that you would expect a dividend to be paid from the settled operating profits of a company.
Furthermore, with a well established company with an on-going and settled business a shareholder expects to get a return year after year. If the company has a bad year then you expect the board to draw on reserves to still deliver the return having put aside a reserve in better years previously. Shareholders elect a board mostly to ensure that the above is the case.
That is the point of the stock market. One takes a risk in the early days in the hope of seeing a business establish itself with a view to a future return on that investment that makes the risk worthwhile.
A buyback, included as a return, is usually pants because you really can’t tell (in 90% of cases) if you are getting any additional value. Meanwhile, in simple terms, those reserves mentioned above are not being replenished but being drawn down from the pool that the dividend is ultimately paid from in order to fund the buyback.
I give up. We appear to have different views on, and understanding of, how things work, so there is not much point going further. Many of the aspects surrounding a buyback (and I am not addressing a tender offer that is available to all shareholders equally) are Company specific so talking in general terms can be misleading.
A quick trawl through the RNS’s I receive on the Companies I hold I can see there are at least 10 (of which 4 are investment trusts) who have used a share buyback. Few of these are on the scale of the LLOY one, although Shell has a considerably larger buyback running at the moment (circa £20bn over about 3 years). I also believe that many Companies have a standard resolution at the AGM that gives the Directors authority to buyback shares, although many decide not to use that authority.
Yeah, sorry about that, I wasn’t trying to pick an argument just for the sake of it, although it seemed to be coming out like that because I think we’re looking at the whole process from a different starting point. Also I’m talking more in general terms about buybacks and not LLOY specifically, which has caused some confusion previously.
The other point is that when a company has accounts as complex as LLOY, its almost impossible to say anything but generalisations about the buyback.
As a shareholder I’d rather not be in a position of having to try and get a feel for the impact of a buyback, it makes thing even less straight-forward.
Lastly, it is very depressing seeing a company buying back shares and the share price continually dropping and before long if you’re following closely you are aware that lot of the money has been spent at too high a price.
I’m not surprised you see so many buybacks going on in the companies you hold. They are almost universal these days. I still am not convinced it is more of a fashion than a solid financial decision.
I’ve held shares in companies such as RR, William Hill and Glencore … and now LLOY, all of whom have had to cancel an unfinished buyback programme because of unforeseen circumstances. That smacks of bad planning to me and I’m suspicious that boards are over-quick to launch buybacks, but I’m unsure of the motivation.
Yes. I think the vast majority of companies now do that. It doesn’t mean they’re all planning on going for a big buyback, many smaller companies take a number of shares a couple of times a year for employee benefit and/or incentive schemes etc, but they really don’t move the needle in most companies, nor are they intended to.
Its not a bad option for the board to have in such a case. They can choose to just ‘place’ new shares, release some for treasury or buyback in the open market if they think the company is under-priced and they wish to avoid dilution.
I have no problem with the exchange of ideas, it just seemed we were not really getting anywhere, since as you said we were approaching it differently. At least it was investing related rather than the interminable rather pointless Brexit sniping.
Lloyds…269 + years of Banking service .
Lick wounds since disaster in year 2008( After massive value loss) …Pay back 42%+ sanctuary financing … . Issue dividend after 8 + years… Announce.1.5B share buy back & activate…Issue more shares for accumulated employee reward bonus…e’s (2 ? 3?)… Share price declines 17% +… Cancel buy back ….Promise return to normal Quarterly dividend. (After 11 + years )
And we still believe in trust and true governance ….time for reflection … with little time left.