The Lemon Fool

Not sure if this is the correct forum for this question however.....

I see that Standard Life Aberdeen - SLA has bought 1,058,156 of its shares from the market and will then cancel these shares. What does this achieve? Can anyone help?

EssDeeAitch wrote:Not sure if this is the correct forum for this question however.....

I see that Standard Life Aberdeen - SLA has bought 1,058,156 of its shares from the market and will then cancel these shares. What does this achieve? Can anyone help?

It does a favour for their instutional mates who want to dump some SLA shares at a favourable price. I don't know about SLA specifically but it may in some cynical cases benefit directors personally, rather than the company, by increasing eps where their income is related to that.

For us, it's a lose-lose situation resulting in a lower div than would be the case if they used that buyback cash to increase payouts. Additionally, buybacks increase debt thereby rendering the company more risky. Incomprehensibly for an income investor, a few Christmas-voting turkeys will support it but why any div player would support toileting cash that could be used for more divs and which increases risk, is beyond me.

The subject of buybacks has been discussed repeatedly round here, probably because some years ago it became a fashion with almost every big cap indulging in it, just because everyone else was, with none of them having the guts to point out that this particular emperor was stark bollock naked. The financial crisis of the late noughties put an end to most of it, not due to a change of heart but simply cos they no longer had the cash. It's been creeping back though and SLA aint the only one.

In certain isolated situations it may be reasonably justified, for example to cover shares issued in scrip div schemes or bids, but as a generality it's a disgusting habit that is totally against the interests of the small investor. But because the latter hardly exists any longer, with the institutions now controlling all big caps, it is their interests which predominate.

pyad wrote:

EssDeeAitch wrote:Not sure if this is the correct forum for this question however.....

I see that Standard Life Aberdeen - SLA has bought 1,058,156 of its shares from the market and will then cancel these shares. What does this achieve? Can anyone help?

It does a favour for their instutional mates who want to dump some SLA shares at a favourable price. I don't know about SLA specifically but it may in some cynical cases benefit directors personally, rather than the company, by increasing eps where their income is related to that.

For us, it's a lose-lose situation resulting in a lower div than would be the case if they used that buyback cash to increase payouts. Additionally, buybacks increase debt thereby rendering the company more risky. Incomprehensibly for an income investor, a few Christmas-voting turkeys will support it but why any div player would support toileting cash that could be used for more divs and which increases risk, is beyond me.

The subject of buybacks has been discussed repeatedly round here, probably because some years ago it became a fashion with almost every big cap indulging in it, just because everyone else was, with none of them having the guts to point out that this particular emperor was stark bollock naked. The financial crisis of the late noughties put an end to most of it, not due to a change of heart but simply cos they no longer had the cash. It's been creeping back though and SLA aint the only one.

In certain isolated situations it may be reasonably justified, for example to cover shares issued in scrip div schemes or bids, but as a generality it's a disgusting habit that is totally against the interests of the small investor. But because the latter hardly exists any longer, with the institutions now controlling all big caps, it is their interests which predominate.

Thanks for the explanation pyad, it paints a nauseating picture however and it seems that there is nothing to be done as it well out of shareholders control. I take it that it is simply an executive decision not subject to approval.

SLA has in issue approx 2471 million ordinary shares so the "effect" will be minimal...1 in 2471.

Where does the money come from to buy the shares , did they have it already, did they dispose of something or have they increased debt to do it?

Why do it? Just having quickly read Pyad's response, I share the cynical view that it might be related to eps to trigger directors bonuses.

Anyway, here's a link to investopedia which discusses share buybacks..

https://www.investopedia.com/terms/s/sh ... rchase.asp

Companies can only purchase their own shares if the shareholders agree. Usually there will be a vote to this effect at the AGM.

TJH

tjh290633 wrote:Companies can only purchase their own shares if the shareholders agree. Usually there will be a vote to this effect at the AGM.

TJH

That's somewhat disingenuous in suggesting the small guy has any choice in the matter.

It's a routine res at most big cap AGMs but as you know institutions control the share cap of those companies. Institutions overwhelmingly like buybacks. Therefore the vote will be near unanimous in favour.

You might find Warren Buffett’s view interesting. Just search for Buffett on share buy backs to find a number of links. In one of his Annual Reports he gave a very detailed description of the circumstances under which he thought buybacks a good idea. This link is just one of many: https://www.cnbc.com/2018/08/31/warren- ... backs.html

I’d be shocked nowadays if executive bonus schemes didn’t take into account the effect of buybacks (and other capital changes, acquisitions, etc). Any remuneration committee worth its salt (which has to have independent directors) will take external advice and/or be paying attention to governance guidelines from people like the IoD.

Best wishes,

Steve

pyad wrote:

tjh290633 wrote:Companies can only purchase their own shares if the shareholders agree. Usually there will be a vote to this effect at the AGM.

TJH

That's somewhat disingenuous in suggesting the small guy has any choice in the matter.

It's a routine res at most big cap AGMs but as you know institutions control the share cap of those companies. Institutions overwhelmingly like buybacks. Therefore the vote will be near unanimous in favour.

The same applies at ITs, where the institutions have less of a voice.

The sheep tend to follow the one in front. A habit of which I am well aware, having been brought up in the Forest of Dean, where the Commoners' sheep roam free.

TJH

I don't really like them either..

But SLA has a yield of circa 9%, taking these shares out removes that liability, which is quite a big saving.

In the round, I don't think that buying them now is a bad thing.

Buybacks are anathema to a dividend investor for the reasons Pyad explains - only one step better than the strange habit of borrowing money to pay dividends.

Although Warren Buffett approves of buy backs, he does so only in quite limited circumstances; and note particularly that he is a growth investor, not a dividend investor. He would prefer the value of a company to be rolled up and compounded, rather than paid out which, he also argues might incur a tax cost. In my view buybacks also show a lack of enterprise on behalf of management: "we can't think of anything to invest in, so we'll improve our eps to make it look like with are succeeding". It's weak, it's in directors' self-interest via bonuses, it's nonsense - outside the limited situation WB specifies. Unfortunately, his approval can be sometimes profferred as an argument that buy backs are generally a good thing, when they almost never are, at least for a HYPer.

Arb.

I'd half forgotten when this kicked off! In addition to the return of capital which was 30-odd pence per share ( 33 /34p)

https://www.londonstockexchange.com/exc ... 73571.html

"On 9 August 2018 the Company announced the commencement of the first tranche of £175m of the share buyback programme. This has now completed and resulted in the repurchase, and cancellation, of 58,686,389 ordinary shares for a total consideration of £174,999,998."

"The Company today announces that it will commence a further tranche of £200m of the share repurchase programme of the Company's ordinary shares (the "Programme")."

"The purchase of Shares will take place during the period commencing on 20 November 2018 and ending no later than 27 March 2019.
"The purpose of the Programme is to reduce the share capital of the Company. All Shares purchased will be cancelled."


So, they will save £12m in divis from the first tranche, then there was the reduction of 34p per share, then tranche 2 buybacks - so, the total divi saving will be £30m ( guess) of the £469m dividends paid ( from JLTbenefits report on FTSE100 companies)

One last comment, their pension fund is very rosy so definitely no need to address pension fund issues (151% funded assets/liabilities).

£200 million at £2.50 per share = 80 million shares, thus saving 80m x £0.21 = £16.8m divi saving from tranche 2 buy backs to add on to the 12m divi saving from tranche 1.

So, maybe this will help protect the divi from falling assets under management? Maybe we should consider this to be positive for an income investor?

monabri wrote:https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/SLA/13873571.html

"On 9 August 2018 the Company announced the commencement of the first tranche of £175m of the share buyback programme. This has now completed and resulted in the repurchase, and cancellation, of 58,686,389 ordinary shares for a total consideration of £174,999,998."

So, they will save £12m in divis

If I had ever proposed an investment of £175m that had a payback of £12m pa (i.e taking over 14 years to pay for itself, ignoring loss of interest or any other utility on the £175m during the ROI period) and which had no other ROI benefits, I'd have been sent packing with a flea in my ear.

It was hard enough to get projects authorised with an ROI of 2 years!

I understand buying up shares to cancel the effects of scrip issues, or issuing shares instead of borrowing, and then buying the shares back as a form of debt repayment - both of which activities are designed to leave the original holders in the same position as they were before, but otherwise I struggle to see any business benefit to buybacks.

When times are hard and prices are depressed, the last thing any board seems to want to do is to squander money on buybacks - but when times are good, cash appears to be easy to replace and share prices are inflated, then the directors go and buy back shares that are at the top of their price range... What I don't understand is why institutional investors are happy to see such destruction of value? Assuming the institutional investors also want value-for-money, and that a "bung to your mates" is no longer as easy as it was, what drives their support for buybacks?

VRD

Well, it certainly hasn't helped the share price!

Arb.

Surely, from a business perspective (that of the company), it makes sense to be buying back shares when the stock price has fallen so much, and as said it then reduces the amount they need to pay out in dividends at the next dividend payment date? Isn't that helpful to the business that we are investing in, and perhaps even helps them to maintain the dividend that we are receiving?
(I don't know if the funding would have been aided by the proceeds of the sale of their life insurance portfolio to Phoenix.)

I topped up during those (autumn) falls. My concern is that SLA (the fund manager) seems to be losing assets.

richfool wrote:(I don't know if the funding would have been aided by the proceeds of the sale of their life insurance portfolio to Phoenix.)

Isn't this all part of that deal or a logical follow up? Having sold what was originally the main part of their reason for existence, they were intending to return the proceeds of sale to shareholders.

If you stumped up for the Phoenix rights issue and also held Standard, you eventually got your own money back.

Alaric wrote:

richfool wrote:(I don't know if the funding would have been aided by the proceeds of the sale of their life insurance portfolio to Phoenix.)

Isn't this all part of that deal or a logical follow up? Having sold what was originally the main part of their reason for existence, they were intending to return the proceeds of sale to shareholders.

If you stumped up for the Phoenix rights issue and also held Standard, you eventually got your own money back.

You know, one of the features of buybacks that really pisses me off is when companies refer to this as "returning money to shareholders". What absolute shite. It implies very strongly that all shareholders have benefited from this action but nothing could be further from the truth. What they should say, but are cowards, is that they have returned money to certain shareholders. The rest of us small investor mugs see nothing of this "return".

A genuine return is a special div for example whereby all shareholders participate equally according to ther holding.

I do agree with your criticism of share buybacks, but special dividends are not the solution. They can be taxed very heavily for some shareholders, at up to 60% for example if they result in pushing the taxpayers income to the range where one loses the personal allowance.

No, the fairest way of returning 'excess capital' is as a capital return, with a share consolidation if need be. SLA have done this several times.

The alternative is a tender offer where all shareholders have the option whether to sell some or all of their holding.

scrumpyjack wrote:I do agree with your criticism of share buybacks, but special dividends are not the solution. They can be taxed very heavily for some shareholders, at up to 60% for example if they result in pushing the taxpayers income to the range where one loses the personal allowance.

No, the fairest way of returning 'excess capital' is as a capital return, with a share consolidation if need be. SLA have done this several times.

The alternative is a tender offer where all shareholders have the option whether to sell some or all of their holding.

Indeed but I said a special div was just an example and didn't intend to enter a discussion about which was the better method. Anything which benefits all shareholders equally must be preferable to the foul practice of buybacks which prefer certain shareholders only. And to add insult to injury, as I said, they then have the cheek to describe this as a return to shareholders. A return which none of us here have ever seen.

EssDeeAitch wrote:Not sure if this is the correct forum for this question however.....

I see that Standard Life Aberdeen - SLA has bought 1,058,156 of its shares from the market and will then cancel these shares. What does this achieve? Can anyone help?

Well, there are some disgraceful comments being made on this theme but I won't name names.

The simple fact is the developed economies are awash with excess capital and have no profitable use for it. They are therefore returning it to their shareholders, effectively reducing the capital of the company. This is why we invest -- to get a return on our capital. There will be eternal arguments as to whether it should be done as a dividend or share purchase but in the long run it makes close to sod-all difference.

SLA is returning cash to shareholders. It's as simple as that. I like it and I like that dividend investors don't like it and am buying.


GS