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SLA share purchases

Practical discussions about equity High-Yield Portfolios (HYP) for income
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Arborbridge
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Re: SLA share purchases

#200998

Postby Arborbridge » February 13th, 2019, 8:06 am

kempiejon wrote:
idpickering wrote:SLA are one that I really should top up maybe, but for some reason I'm reluctant to do so? It's the old, if the yield looks to good to be true etc.....
Ian.


Ian your reluctance should be if your safety factors, sustainability of dividend and portfolio diversification metrics don't stack up etc... Not just because it's too good to be true, sometimes it can good. If memory serves didn't you top up Shell on 8% plus? I did.
Yield is a factor of dividend amount and share price, the share price varies with market sentiment and looks like it's not been this low for years. HYPing often looks for unloved shares that's what drives the yield higher. SLA offers 8% plus, that's high, they are a big cap in the larger index, dividend is covered 1.4 times according to webfg but forecast to fall by the same source as is next years dividend. SLA is the merged version of Aberdeen and Standard Life so in it's current carnation doesn't have much history. I hold as I chose Aberdeen for my HYP. If I was picking again and using webfg for screening the forecast reduced dividend and slim cover and lack of "proper" history in this current form would probably stay my buying finger. So I agreed with your reluctance to top up but not because the yield is too high.


But... the reason the share price is low, and the yield is high, isn't just some "market" being awkward or testy - it could well be the result of conclusions such as you have just drawn meaning that investors are doing likewise and staying their "buying fingers".

In other words, investors have concluded it's all too risky and the yield becomes too good to be true, or needs to be very high due to the risk - thus confirming that it is too risky for us too.

In my view, high yield makes HYP as high risk policy which is why we mitigate the risk in various ways: we hope to muddle through on capital but achieve a higher level of income. It's very much, you win some and lose some in the short term, but win overall in the long term.

BTW, SLA is in the top-up zone for me, and I might well be doing so. However, I have my own partocular problem in that several financial companies are looking good for top-ups (Aviva, SLA, Lloyds at least) but my financial sector is already at 27% with life insurance being a smidgeon over 10%.

Arb.

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Re: SLA share purchases

#201080

Postby Gengulphus » February 13th, 2019, 1:55 pm

pyad wrote: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.

That last part isn't true. Plenty of us have seen a return from share buybacks - it's just that it's a slow, long-term dividend growth return - I do of course realise that looking at things in a long-term dividend-oriented way is a bit of a radical idea around here... ;-}

For example, consider GlaxoSmithKline over its last 15 reported financial years, which are 2003-2017 (2018 is complete and its full year results are out, but not its annual report). Along with partial data for 2002 to provide a baseline for a 15-year comparison, what it's done over those years is summarised in the table below. Buybacks reduced its number of shares in issue by 1397.14m, partially offset by employee/director share schemes increasing it by 243.30m for a net reduction of 1153.84m (this doesn't quite match the reduction in the "Shares" column, but I wouldn't expect it to - see the (***) footnote). As a result, the dividend per share increased by 100.0% even though the total dividends paid by the company per year only increased by 66.7% - or put another way, if only enough buybacks had been done to offset the shares issued by the share schemes (the cost of those buybacks should IMHO be thought of as a cost of the share schemes), the dividend per share would now have been about £3.911b/5.912b = 66.15p rather than 80p. So HYPers who have held the shares for those 15 years are receiving about a dividend that's about 21% higher than it would have been without the buybacks in excess of those needed to 'fund' the share schemes, or about 1.28% per year compounded.

I don't think that's a good return us on the billions that were spent on the buybacks compared with many other things the company could have done with the money. But it is a return, and so saying we haven't seen a return from the buybacks isn't true.

I should add that I agree with most of the other criticisms of buybacks on this thread, such as them treating shareholders unequally in practice and giving less-than-scrupulous directors opportunities to exploit poorly-designed Long Term Incentive Plans and the like.


(*) For the number of shares, I've used the basic weighted average number of shares in issue for the year from the annual report's EPS calculation.

(**) Where a special dividend was paid, these are given in ordinary+special form. In both cases where this happened, there was no accompanying share consolidation, so no shares-in-issue change for it.

(***) The last two columns describe shares-in-issue changes due to buybacks and share schemes for directors and employees. Note that the figures are the changes to the number of shares, and in particular not the monetary amounts spent in the case of buybacks - those are much greater! Also note that they don't match up precisely with the changes to the "Shares" column, as they're changes from the beginning to the end of the year, while the "Shares" column is averages for the whole year.

Note that those buybacks and share schemes were the only two causes for shares-in-issue changes during all those years - no share splits, consolidations, rights issues, open offers, placings, etc. For the purpose of this analysis, that makes it an exceptionally nicely-behaved share, especially as it's also done quite a lot of buybacks and had no dividend shocks worse than a held dividend. That's basically why I decided to use GlaxoSmithKline as my example - the analysis and this post would be a lot messier for the vast majority of HYP companies!

Gengulphus

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Re: SLA share purchases

#201082

Postby EssDeeAitch » February 13th, 2019, 2:15 pm

Gengulphus wrote:
pyad wrote: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.

That last part isn't true. Plenty of us have seen a return from share buybacks - it's just that it's a slow, long-term dividend growth return - I do of course realise that looking at things in a long-term dividend-oriented way is a bit of a radical idea around here... ;-}

For example, consider GlaxoSmithKline over its last 15 reported financial years.......................................................
...............
Gengulphus


Many thanks for this considered response. It is clearly a topic that divides opinion but the weight of the argument seems to be that even though share buy backs can be of benefit to all shareholders they...

1 - certainly are benefit to some shareholders
2 - may be a mechanism simply to line the pockets of executives
3 - could be to the detriment of all.

On balance, a bad thing then?

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Re: SLA share purchases

#201084

Postby TheMotorcycleBoy » February 13th, 2019, 2:41 pm

EssDeeAitch wrote:Many thanks for this considered response. It is clearly a topic that divides opinion but the weight of the argument seems to be that even though share buy backs can be of benefit to all shareholders they...

1 - certainly are benefit to some shareholders
2 - may be a mechanism simply to line the pockets of executives
3 - could be to the detriment of all.

On balance, a bad thing then?

My tuppence worth.

I'd rather get a special dividend, than see buybacks. However if 1) a company maintains it's profits 2) pays the same proportion of profits as dividends, then a buyback does, surely, constitute a delayed capital return to *all* share holders......because when it next pays a div it can *theoretically* raise the div per share with ease, since the number of shares to stump up for has been reduced.

As an extreme example if a firm reduces it's number of issued shares by half, then the existing shareholders should be able to receive twice the previous dividend (as long as the conditions I mentioned in 1) and 2) hold true.)

I think!

Matt

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Re: SLA share purchases

#201088

Postby GoSeigen » February 13th, 2019, 3:01 pm

TheMotorcycleBoy wrote:I'd rather get a special dividend, than see buybacks. However if 1) a company maintains it's profits 2) pays the same proportion of profits as dividends, then a buyback does, surely, constitute a delayed capital return to *all* share holders......because when it next pays a div it can *theoretically* raise the div per share with ease, since the number of shares to stump up for has been reduced.

As an extreme example if a firm reduces it's number of issued shares by half, then the existing shareholders should be able to receive twice the previous dividend (as long as the conditions I mentioned in 1) and 2) hold true.)

I think!

Matt


Correct, in fact I think another poster made exactly this point further up... ;-)

Agree with Gengulphus et al that abuse of buybacks is not unknown and bad. However, the same could be said of dividends; I really don't see that the subject of abuse is relevant to whether buybacks are as much a distribution as dividends or not. Abuse is a red herring unless it can be shown to be pervasive, significant and unavoidable.

GS

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Re: SLA share purchases

#201090

Postby scrumpyjack » February 13th, 2019, 3:07 pm

At least I see Whitbread today announced that the bulk of their cash distribution from the sale of Costa will be via a £2 billion tender offer. A very good decision IMO, as was the original purchase of Costa many years ago for £19 million and the recent sale of it for £3,900 million

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Re: SLA share purchases

#201123

Postby TheMotorcycleBoy » February 13th, 2019, 5:31 pm

Anyway, since most modern firms reward their employees periodically with share offers (my current and last 2 employers have for me), don't these firms have to undertake regular buybacks in order to periodically recover surplus stock?

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Re: SLA share purchases

#201131

Postby tjh290633 » February 13th, 2019, 5:59 pm

TheMotorcycleBoy wrote:Anyway, since most modern firms reward their employees periodically with share offers (my current and last 2 employers have for me), don't these firms have to undertake regular buybacks in order to periodically recover surplus stock?

A lot of them will buy the shares required in the market. That avoids diluting the equity. They may buy when the price is depressed and hold in Treasury until needed.

TJH

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Re: SLA share purchases

#201148

Postby Raptor » February 13th, 2019, 6:47 pm

tjh290633 wrote:
TheMotorcycleBoy wrote:Anyway, since most modern firms reward their employees periodically with share offers (my current and last 2 employers have for me), don't these firms have to undertake regular buybacks in order to periodically recover surplus stock?

A lot of them will buy the shares required in the market. That avoids diluting the equity. They may buy when the price is depressed and hold in Treasury until needed.

TJH

When I was working full time in the past this is what the companies I worked for did. They would work out what shares were needed for the schemes and do exactly this.

Raptor.

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Re: SLA share purchases

#201335

Postby Gengulphus » February 14th, 2019, 1:00 pm

tjh290633 wrote:
TheMotorcycleBoy wrote:Anyway, since most modern firms reward their employees periodically with share offers (my current and last 2 employers have for me), don't these firms have to undertake regular buybacks in order to periodically recover surplus stock?

A lot of them will buy the shares required in the market. That avoids diluting the equity. They may buy when the price is depressed and hold in Treasury until needed.

Yes, they do that - but it doesn't actually avoid diluting the equity is any very meaningful way. That's because shares in Treasury are not counted as existing for almost all purposes: as three particularly relevant examples (but by no means the only ones), they're not counted as being in issue when calculating EPS or market cap and they're not paid dividends. So when shares are bought back and placed in Treasury, they disappear from the market cap, dividend payouts and an accounting calculation of what the company has available per share just as thoroughly as shares that are bought back and cancelled do, and if and when they're subsequently released from Treasury, they appear in those things just as thoroughly as newly-issued shares do. Basically, for almost all purposes buybacks have an antidilutive effect on the equity no matter whether the bought-back shares are cancelled or put into Treasury, and employee share schemes have a dilutive effect on the equity no matter whether the shares the employees get are released from Treasury or newly-issued.

The only real exceptions to that "for almost all purposes" are (a) that the bureaucratic process of releasing shares from Treasury is cheaper and easier for the company than that for issuing new shares; (b) that in company law, money used for buybacks comes from a company's 'distributable reserves' and issuing new shares cannot put money into those reserves, but releasing shares from Treasury can return some or all of what went into the buybacks to them. Dividends are also paid from those distributable reserves, and a company cannot legally pay dividends in excess of its distributable reserves, so the fact that buyback/put in to Treasury/return from Treasury reduces distributable reserves by less overall than buyback/cancel/issue new shares makes the former better for the company's legal ability to pay dividends when the bought-back shares are likely to be wanted for employee share schemes (or some other purposes).

I am only talking about the company's legal ability to pay dividends here, not really about its financial ability to do so. The payments its business makes and receives are basically the same either way (other than some administrative/legal costs being greater for the buyback/cancel/issue new shares route), so it's just a matter of what the company is permitted to do under company law. And company law does recognise that by making it possible for companies to transfer non-distributable reserves to distributable ones - but generally only with shareholder and Court approval, and companies have to pay administrative and legal costs if they want to get those! (As an aside, I've heard that the main purpose of the relevant bits of company law is creditor protection, with creditors being given the chance to object to making the company's capital distributable. It obviously doesn't provide anything like full creditor protection - witness Carillion! - but it does make it possible for them to rely to some extent on a company's financial strength.)

To summarise, putting shares that might be wanted again for employee share schemes (and some other purposes) into Treasury and later releasing them from Treasury is slightly better from a HYPer's point of view than cancelling them and later issuing new shares for those purposes, because it reduces various administrative and legal costs of the company. Otherwise, the two methods should IMHO be treated as the same for decisions made in running the HYP.

Though as a final note, it is definitely a difference one sometimes needs to be aware of if one dives deeply enough into company accounts. I encountered one case of that when I looked in GlaxoSmithKline's annual reports for my post above about the return we've had from its buybacks. For example, in its 2017 annual report, note 15 "Earnings per share" gives its weighted average number of shares in issue during the year as 4.886b, but note 33 "Share capital and share premium account" gives its shares in issue at the end of the year as about 5.373b. That's about a 10% difference and far bigger than is reasonable for the difference between the average during the year and the end-of-year figure for a company that isn't doing much with its share capital, and the reason for it is very largely shares being held in Treasury, as evidenced by this RNS from very near the end of 2017.

Gengulphus

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Re: SLA share purchases

#201528

Postby richfool » February 15th, 2019, 11:16 am

I spotted this on yahoo finance, but haven't yet found the details of the "share offering":
Standard Life Aberdeen slumped 6.7 percent and was on course for its steepest one-day fall in a year after a share offering was priced at a discount.

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Re: SLA share purchases

#201548

Postby richfool » February 15th, 2019, 12:30 pm

I've found the answer now:
Standard Life Aberdeen slumps as Mitsubishi UFJ sells stake
Fri, 15th Feb 2019 11:13
(Sharecast News) - Investment manager Standard Life Aberdeen was under the cosh on Friday as it emerged that Mitsubishi UFJ Trust and Banking Corporation sold its entire stake in the company.

Mitsubishi UFJ said in a statement that it sold 148.6m shares for around £349.3m.


http://www.lse.co.uk/sharecast-news-art ... ells_stake

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Re: SLA share purchases

#201550

Postby plodder » February 15th, 2019, 12:40 pm

I think the share offering may be explained by the morning star article http://www.morningstar.co.uk/uk/news/AN_1550224216694628900/top-news-mitsubishi-ufj-sells-entire-stake-in-standard-life-aberdeen-(alliss).aspx re sale of 148 million shares by Mitsubishi UFJ at around 132p.

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Re: SLA share purchases

#201556

Postby monabri » February 15th, 2019, 1:08 pm

On a positive note, Mitsubishi UFJ dumping a significant number of shares means that SLA will be hoovering them up. The SLA share buyback programme is on until 27 March.

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Re: SLA share purchases

#201601

Postby scrumpyjack » February 15th, 2019, 4:00 pm

Also someone must have bought the shares that Mitsubishi sold. Presumably investment bankers hoping to make a profit reselling them

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Re: SLA share purchases

#201607

Postby richfool » February 15th, 2019, 4:29 pm

scrumpyjack wrote:Also someone must have bought the shares that Mitsubishi sold. Presumably investment bankers hoping to make a profit reselling them

Perhaps as Monabri suggested, SLA may have "hoovered" some up. Plus, I bought a few.

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Re: SLA share purchases

#201680

Postby monabri » February 15th, 2019, 11:20 pm

https://www.thenational.scot/news/17434 ... -for-130m/

'Standard Life Aberdeen offices at St Andrew Square in Edinburgh are reportedly up for sale at a rumoured asking price of £130 million."

"The Standard Life Aberdeen building contains more than 100,000 square feet of offices which houses up to 1000 staff. It is also home to the popular Ivy restaurant and other eateries as well as a branch of TK Maxx". ( :!: )

"It has been widely reported that the property fund has been disposing or trying to dispose of assets after underperforming recently."

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Re: SLA share purchases

#201688

Postby Alaric » February 15th, 2019, 11:52 pm

monabri wrote:"It has been widely reported that the property fund has been disposing or trying to dispose of assets after underperforming recently."


Was that the same Property fund that suspended the rights of unitholders to surrender?

https://realassets.ipe.com/news/investm ... ullarticle

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Re: SLA share purchases

#202218

Postby NeilW » February 19th, 2019, 6:21 am

pyad wrote: What they should say, but are cowards, is that they have returned money to certain shareholders.


It seems to me that they return company money to people who no longer want to be invested in the company. Why not return the money to those that wish to remain invested?

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Re: SLA share purchases

#202219

Postby Dod101 » February 19th, 2019, 7:05 am

Sadly, at least in my opinion, pyad does readers no favours by expressing the views he does and by the way he expresses them. Share buybacks are used for a variety of reasons and I think that they are an efficient way for a company to reduce its capital base. The whole point of the sale by SLA of Standard Life's life insurance business to Phoenix Holdings was to become a 'capital light' investment manager. Share buybacks are an efficient way of reducing the capital in the business by reducing the number of shares in the market, in a very straightforward way. If they were to reduce the cash in the business (not quite the same thing) by paying a special dividend they would still have the problem of reducing the number of shares in the marketplace, and in any case, as has been said, they need to have the distributable reserves before they can pay a special dividend. Dividends ought only to be paid as a result of trading not reconstruction of capital.

The other thing about share buybacks is that they will usually help the continuing shareholders a) by reducing the number of mouths to be fed from future dividends, and (b), if they are bought at a price less than the book value, will probably help the share price. They also as a result of (a) increase modestly the economic interest of all continuing shareholders.

There are many and varied reasons for a company to buyback its shares and I am not particularly defending SLA. I do not hold them and have no interest in doing so. I think the best that can be said of SLA at the moment is that Sir Douglas Flint is the newly appointed non exec chairman. He might have so influence in improving the governance.

Dod


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