Opinions on share buybacks?

[westmoreland]

Just looking through Dominos Pizza Plc - the shares don't look particularly undervalued to me. P/E is over 23.

Despite this the board have been buying back stock both this year and last, and plan to buy back not far off £100m in total (around 6.3% of market cap). not only that, the board have decided to increase leverage, partly to fund higher buybacks than if only the balance of net income was used.

surprise surprise one of the key performance metrics for executive pay is EPS growth:

Underlying EPS measures the Company’s success in delivering long‐term profit growth, a key contributor to the Company’s valuation, and is considered by the Committee to be the
most appropriate measure of long‐term financial performance. It is also used by the Board to determine success in executing our strategy.

does anyone know if EPS targets exclude the effect of buybacks? if not it looks like the board are brazenly destroying value to help ensure they get their bonuses.

[WickedLester]

I don't know the answer to your specific question but I agree that generally share buybacks are only a good idea if the shares are obviously cheap and real shareholder value will be created through them.

I remember LDSG buying back millions of their shares at a deep discount to TNAV which should obviously boost the value for the remaining shareholders so I was in favour of it. If I were being cynical I would also say that it helped the two Swedes that own most of it to boost their shareholdings up to the maximum possible.

From what you say about Dominos it doesn't look like this will be the case.

[ADrunkenMarcus]

Just looking through Dominos Pizza Plc - the shares don't look particularly undervalued to me. P/E is over 23.

I'd have preferred share buybacks a few months back when the share price was closer to 270p and the dividend yield had crept significantly above 3%. However, Domino's has usually had a high PE and I think it was in the 30s when I bought back in 2010. The PE has come down, nonetheless it's delivered a 16.5% CAGR on a total return basis for me over eight years.

On the issue of leverage, the company has a highly cash generative business model with high returns on capital employed. Those returns will be higher than the interest rates on the monies borrowed. On that basis, I can see the merit in borrowing when they are able to finance those borrowings at relatively low rates of interest. It may be that they felt that they would not be able to raise such financing at those lower rates in a few years' time.

If they deploy that leverage in buying back shares then I would prefer it was done at a lower valuation than at the moment, but we must also bear in mind that if they buy back and cancel over 6% of the company's current market capitalisation then they will make a recurring saving in future years as the dividend will be spread over fewer shares in issue. They could, therefore, either raise the rate of growth in dividends per share or maintain current plans and use the saving for investment in the business such as marketing and promotion.

Best wishes

Mark.

[westmoreland]

Just looking through Dominos Pizza Plc - the shares don't look particularly undervalued to me. P/E is over 23.

I'd have preferred share buybacks a few months back when the share price was closer to 270p and the dividend yield had crept significantly above 3%. However, Domino's has usually had a high PE and I think it was in the 30s when I bought back in 2010. The PE has come down, nonetheless it's delivered a 16.5% CAGR on a total return basis for me over eight years.

On the issue of leverage, the company has a highly cash generative business model with high returns on capital employed. Those returns will be higher than the interest rates on the monies borrowed. On that basis, I can see the merit in borrowing when they are able to finance those borrowings at relatively low rates of interest. It may be that they felt that they would not be able to raise such financing at those lower rates in a few years' time.

If they deploy that leverage in buying back shares then I would prefer it was done at a lower valuation than at the moment, but we must also bear in mind that if they buy back and cancel over 6% of the company's current market capitalisation then they will make a recurring saving in future years as the dividend will be spread over fewer shares in issue. They could, therefore, either raise the rate of growth in dividends per share or maintain current plans and use the saving for investment in the business such as marketing and promotion.

Best wishes

Mark.

the cost of borrowing for domino's is probably about 4%.

the required rate of return in the market as a whole is probably at least 7-8% at the moment.

the return on buying shares are 330p is currently 4.8% (16p adjusted earnings per share).

borrowing at 4% to buy an asset yielding 4.8%, when the market expects a minimum return of 7-8% is going to destroy value for remaining shareholders.

there should be plenty of uses for this cash within the business. if not, a special dividend should have been paid.

[ADrunkenMarcus]

the cost of borrowing for domino's is probably about 4%.

the required rate of return in the market as a whole is probably at least 7-8% at the moment.

the return on buying shares are 330p is currently 4.8% (16p adjusted earnings per share).

borrowing at 4% to buy an asset yielding 4.8%, when the market expects a minimum return of 7-8% is going to destroy value for remaining shareholders.

there should be plenty of uses for this cash within the business. if not, a special dividend should have been paid.

On those figures then even 270p would be an earnings yield of under 6%. I'd find it helpful if you knew of any literature exploring this in more detail? If a business can average about 44% return on capital employed since 2000, isn't borrowing - even at 4% - beneficial? I don't know how they would take into account the savings from not paying a dividend on the bought-back shares?

It would be interesting to know if Domino's had any specific criteria in terms of share buybacks, but they would also need to follow that from an evaluation of the returns generated by other possible uses of capital.

Best wishes

Mark.

[westmoreland]

the cost of borrowing for domino's is probably about 4%.

the required rate of return in the market as a whole is probably at least 7-8% at the moment.

the return on buying shares are 330p is currently 4.8% (16p adjusted earnings per share).

borrowing at 4% to buy an asset yielding 4.8%, when the market expects a minimum return of 7-8% is going to destroy value for remaining shareholders.

there should be plenty of uses for this cash within the business. if not, a special dividend should have been paid.

On those figures then even 270p would be an earnings yield of under 6%. I'd find it helpful if you knew of any literature exploring this in more detail? If a business can average about 44% return on capital employed since 2000, isn't borrowing - even at 4% - beneficial? I don't know how they would take into account the savings from not paying a dividend on the bought-back shares?

It would be interesting to know if Domino's had any specific criteria in terms of share buybacks, but they would also need to follow that from an evaluation of the returns generated by other possible uses of capital.

Best wishes

Mark.

hi mark,

there are two excellent sources i have used to understand share buybacks.

first is fund smith:

https://www.fundsmith.co.uk/docs/defaul ... ?sfvrsn=18

second is next plc:

http://www.hollandadvisors.co.uk/cms/re ... ybacks.pdf

the Next Plc one is explained in more simple terms.

back to domino's - they have not published any information relating to any return hurdle they apply, or any price beneath which they will not buy, hence my scepticism.