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Share buybacks: a beautiful thing

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
Arborbridge
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Re: Share buybacks: a beautiful thing

#246795

Postby Arborbridge » August 24th, 2019, 5:38 pm

vrdiver wrote:
simoan wrote:Whilst I have nothing to add to this thread, I will just refer to what I consider to be the bible on share buybacks. IMHO Everyone that invests in shares of companies (especially those regularly doing buybacks) should read this PDF by Terry Smith and team...

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

All the best, Si


For those who don't want to read the whole thing (which is well worth reading, by the way!)

Summary
Most share buybacks now destroy value for remaining shareholders


There are so many quotables in that article including:
Share buybacks need to be viewed with more than average skepticism when done by companies whose management are incentivised by growth in Earnings Per Share

and some timeless advice from Buffett.

The cynic in me makes me believe that the whole thing is probably manipulation to serve the management. All smoke and mirrors.

Arb.

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Re: Share buybacks: a beautiful thing

#246801

Postby PrefInvestor » August 24th, 2019, 6:13 pm

Hi All, I think that most buybacks (especially at large companies) are done because of the various schemes that they run that have the effect of issuing millions of new shares every year eg employee share incentive schemes, scrip schemes etc. Companies like HSBA issue a boatload of shares every year as part of their scrip scheme, that’s likely true of many other big companies too, perhaps smaller ones as well. Operating these schemes makes having a buyback every so often (and cancelling the shares bought to reduce the number if shares in circulation) pretty well essential, as otherwise after a few years the dilution effect that they would cause would start to have a significant impact on other shareholders.

The current Lloyds buyback is a good example of this, it’s sole purpose is to reduce the share count which is made clear in the RNS announcing the buyback. That being the purpose typically the company running the buyback quite often buys a similar number of shares each day and doesn’t try to optimise their buying to benefit the share price. This frustrates some shareholders who seem to think that the buyback should be being optimised to have the most positive effect possible on the share price and/or to actually make money for the company. They completely miss the point that a) that this is not the purpose of the buyback b) so doing would be market manipulation by the FCA, who have rules covering buybacks.

Personally I don’t go much on buybacks, but do recognise them as a necessity in the situation described above. Not too keen on special dividends either, which are often touted as being good for shareholders, but in my experience mostly just end up giving you some of your capital back and no profit at all.

Not a HYPer myself but still not a fan of buybacks......but I accept that they are necessary

ATB

Pref

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Re: Share buybacks: a beautiful thing

#246815

Postby PrefInvestor » August 24th, 2019, 9:18 pm

On re-reading I found a word missing from my last post, para 2 last sentence should have read “....be considered market manipulation by the FCA....”.

Pref

vrdiver
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Re: Share buybacks: a beautiful thing

#246830

Postby vrdiver » August 24th, 2019, 11:05 pm

PrefInvestor wrote:Hi All, I think that most buybacks (especially at large companies) are done because of the various schemes that they run that have the effect of issuing millions of new shares every year eg employee share incentive schemes, scrip schemes etc.

When a company is buying its own shares to negate the issue of scrip or bonus shares, they are not doing so to "return value to shareholders". In the case of scrip, it's (generally) neutral, as the cash to purchase the share came from the dividend that wasn't paid to shareholders. In the case of incentive plans, it's a negative, as the share buybacks are effectively the cash that was given to staff, so definitely not a return of value to shareholders.

Shares that are purchased and cancelled, as opposed to being redistributed, could be of value to shareholders (by making their slice of the company bigger) but as has been discussed above (Terry Smith's and Buffet's views) this is often a destroyer of value rather than a creator.

I'd be interested to learn of any companies that have been shown to add value (to shareholders) through share buybacks.

VRD

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Re: Share buybacks: a beautiful thing

#246831

Postby tjh290633 » August 24th, 2019, 11:10 pm

There has been a useful exchange of views in this topic. Companies always describe share buybacks as returning money or value to the shareholders. One desired objective is to enhance the share price. We have only to look at the example of Lloyds Bank Group to see that this approach has been a failure. If the money had instead been used to enhance the dividend, the share price would have risen to reduce the yield to a sensible level. That would truly be giving more value to the shareholders.

If the company wishes to reduce the number of its shares, then surely a return of capital to the shareholders, coupled with a share consolidation, is a far more satisfactory and equitable method. If a company wishes to raise more capital, the shareholders have the right to be the first to contribute via a rights issue, unless that right is waived by a resolution passed at the AGM. Surely the converse should be mandatory.

TJH

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Re: Share buybacks: a beautiful thing

#246841

Postby PrefInvestor » August 25th, 2019, 7:30 am

tjh290633 wrote:......One desired objective is to enhance the share price. We have only to look at the example of Lloyds Bank Group to see that this approach has been a failure.".......


But enhancing the share price was never an objective of the Lloyds buyback, except in the minds of some shareholders. It’s sole objective was to reduce the number of outstanding shares.

ATB

Pref

Arborbridge
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Re: Share buybacks: a beautiful thing

#246842

Postby Arborbridge » August 25th, 2019, 7:39 am

PrefInvestor wrote:
tjh290633 wrote:......One desired objective is to enhance the share price. We have only to look at the example of Lloyds Bank Group to see that this approach has been a failure.".......


But enhancing the share price was never an objective of the Lloyds buyback, except in the minds of some shareholders. It’s sole objective was to reduce the number of outstanding shares.

ATB

Pref


It probably wasn't the objective - but TJH believes it should have been, and we, the shareholders, might have been better off as a result. As it is, the share price has languished.

Arb.

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Re: Share buybacks: a beautiful thing

#246843

Postby Dod101 » August 25th, 2019, 7:41 am

vrdiver wrote:
I'd be interested to learn of any companies that have been shown to add value (to shareholders) through share buybacks.


As I said earlier Investment trusts regularly add value for continuing shareholders if they buy their shares at a discount to NAV> Actually that applies to all companies but is more difficult to show they are buying at less than NAV for most trading companies.

Dod

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Re: Share buybacks: a beautiful thing

#246846

Postby vrdiver » August 25th, 2019, 7:54 am

Dod101 wrote:As I said earlier Investment trusts regularly add value for continuing shareholders if they buy their shares at a discount to NAV

Short term, I agree with you, but longer term for value creation the company shares that compose the NAV itself need to be under-valued at the time of the buyback, else the IT will suffer the same problems as any other company buying over-valued assets.

Of course, if the IT is also selling its own shares when they are at a premium to the NAV, then this isn't really a "share buyback" but a trading strategy, which isn't comparing apples with apples any more...

VRD

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Re: Share buybacks: a beautiful thing

#246850

Postby Itsallaguess » August 25th, 2019, 8:53 am

vrdiver wrote:
Dod101 wrote:
As I said earlier Investment trusts regularly add value for continuing shareholders if they buy their shares at a discount to NAV


Short term, I agree with you, but longer term for value creation the company shares that compose the NAV itself need to be under-valued at the time of the buyback, else the IT will suffer the same problems as any other company buying over-valued assets.


[My bold above].....Can you explain how you come to that conclusion?

I'd agree with you if that was perhaps to deliver the ideal IT value-creation mechanism when using buybacks, but I think even if the shares of the underlying companies only ever stayed equal in value to the associated individual NAV's, then so long as an IT can take advantage where the IT itself is being undervalued by the market, when compared to the aggregated Net Asset Value of those underlying holdings, then I would think that over the long-term that would be fine too..

Can you explain why you think that the underlying holdings would 'need to be under-valued' at the time of the IT buyback'?

Cheers,

Itsallaguess

Dod101
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Re: Share buybacks: a beautiful thing

#246853

Postby Dod101 » August 25th, 2019, 9:11 am

To take up IAAG's point, I see the the value of the IT's own shares and the value of the underlying holdings as two separate issues. Obviously the underlying holdings' value is changing all the time and all that the Directors of the IT can do is take a point in time to value these and so calculate the NAV of the IT's own shares. Then act accordingly, or not, as they decide.

Dod

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Re: Share buybacks: a beautiful thing

#246857

Postby vrdiver » August 25th, 2019, 9:28 am

Itsallaguess wrote:
vrdiver wrote:but longer term for value creation the company shares that compose the NAV itself need to be under-valued at the time of the buyback, else the IT will suffer the same problems as any other company buying over-valued assets.


Can you explain how you come to that conclusion?

OK, here's my line of argument. (I'm happy to have it proven false, as it's a "first principles" line of reasoning that may simply not hold true!)

An IT will buy its own shares at a discount to NAV. If it then sells them at a premium to NAV then it is trading, rather than reducing the number of shares in circulation, so not relevant for the purposes of the "buybacks destroy/create value" argument.

For an IT that purchases its own shares to cancel them, let's say at a 5% discount to NAV, if that transaction corresponds to an over-valuation of the underlying assets, then the under- and over-valuations net off. If, as Terry Smith has opined, share buybacks usually destroy value, then the question is whether the buy-back is creating more value than anything else that could have been done with that money - e.g. purchase of more assets that would generate more wealth.


Oh oh.... Reading the above, I see the fallacy - buy discounted shares of assets, or buy fully priced assets!

I stand corrected. (and thank you for asking the question)

VRD

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Re: Share buybacks: a beautiful thing

#246859

Postby PrefInvestor » August 25th, 2019, 9:28 am

Arborbridge wrote:It probably wasn't the objective - but TJH believes it should have been, and we, the shareholders, might have been better off as a result. As it is, the share price has languished.


Hi Arb, I do not believe that it is permissible for a company to have increasing the share price as the explicitly stated objective of a buyback scheme, not in the UK anyway. I suspect that doing so would likely constitute market abuse ?.

Its not hard to imagine all sorts of abuse arising if this sort of thing were possible with companies unrealistically hyping their SP before dumping the shares at some point to make a profit – it would permit a form of Ponzi scheme. Not saying that any big reputable company would do this, but others might. The FCA has a set of rules governing buybacks which as I recall, limit the volume that can be bought on any given day and the (maximum) price at which a company can buy their own shares amongst other things. You can look them up in the FCA Handbook yourself if you want to see the detail.

In practice the big companies also go to great lengths to avoid any buying pattern becoming discernible to the public, for fear that this will provide the opportunity for them to exploit any such pattern to make money. So the buying is typically done by computer software which organises trades in pseudo random quantities and short pseudo random time intervals spread over the whole trading day. At least that’s been the pattern that I have observed in several previous buybacks by downloading and analysing the trade data.

ATB

Pref

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Re: Share buybacks: a beautiful thing

#246861

Postby Itsallaguess » August 25th, 2019, 9:40 am

vrdiver wrote:
Itsallaguess wrote:
vrdiver wrote:but longer term for value creation the company shares that compose the NAV itself need to be under-valued at the time of the buyback, else the IT will suffer the same problems as any other company buying over-valued assets.


Can you explain how you come to that conclusion?


For an IT that purchases its own shares to cancel them, let's say at a 5% discount to NAV, if that transaction corresponds to an over-valuation of the underlying assets, then the under- and over-valuations net off. If, as Terry Smith has opined, share buybacks usually destroy value, then the question is whether the buy-back is creating more value than anything else that could have been done with that money - e.g. purchase of more assets that would generate more wealth.


Oh oh.... Reading the above, I see the fallacy - buy discounted shares of assets, or buy fully priced assets!

I stand corrected. (and thank you for asking the question)


Thanks - my line of thinking was along these lines when using your example and then mine -

1. (vrdriver example) - An IT sits at a discount to it's underlying NAV, and also, those underlying NAV's are undervaluing the individual companies - Result - 'double-whammy' value-creation, taking advantage of two distinct and separate 'undervaluation situations'..

2. (my example) - An IT sits at a discount to it's underlying NAV, but those underlying NAV's are equal in value to the underlying companies - Result - 'single-whammy' value-creation, taking advantage of just one 'undervaluation situation'..

So I think whilst you'd be right in saying that a discounted IT which has underlying holdings that are also being separately undervalued by the market would deliver the ideal 'buy-back' scenario, I don't think it's necessarily the case that IT's can't still take advantage where such underlying holdings may 'just' be valued equal to their individual NAV's by the market - it's just the case that the 'value-creation' wouldn't be quite as 'turbo-charged' as the earlier situation...

Cheers,

Itsallaguess

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Re: Share buybacks: a beautiful thing

#246865

Postby Dod101 » August 25th, 2019, 9:56 am

PrefInvestor wrote:In practice the big companies also go to great lengths to avoid any buying pattern becoming discernible to the public, for fear that this will provide the opportunity for them to exploit any such pattern to make money. So the buying is typically done by computer software which organises trades in pseudo random quantities and short pseudo random time intervals spread over the whole trading day. At least that’s been the pattern that I have observed in several previous buybacks by downloading and analysing the trade data.


That I assume is part of the controls that the FCA puts in place. Otherwise you could have smart traders taking advantage of a buyer standing in the market place offering to buy and ramping up the price. Mind you it must be quite difficult to conceal someone like Shell and their huge buyback underway at the moment. It is of course spread over a long period.

Anyhow I think the title for this thread is unfortunate because whilst share buybacks can be good they can also be neutral at best.

Dod

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Re: Share buybacks: a beautiful thing

#246873

Postby Steveam » August 25th, 2019, 11:55 am

Has anyone mentioned tax? (I might have missed it).

I pay 32.5% tax on the dividends I receive (unprotected account) and only 20% CGT. There is some argument here, from my perspective, that extracting money by dividends is inefficient.

Best wishes,

Steve

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Re: Share buybacks: a beautiful thing

#246881

Postby PrefInvestor » August 25th, 2019, 12:56 pm

Steveam wrote:Has anyone mentioned tax? (I might have missed it).

I pay 32.5% tax on the dividends I receive (unprotected account) and only 20% CGT. There is some argument here, from my perspective, that extracting money by dividends is inefficient.


Hi SteveAM, Its not immediately obvious to me how your tax comment relates to the subject of buybacks ?. Special dividends, yes – I can see why you wouldn’t be keen on those !.

I guess that the word “(unprotected)” jumps out at me from your post. Do you not have an ISA and/or SIPP in place ?. If not why not ?. Or perhaps you have but cannot get all of your money into these tax shelters fast enough and so are left with money in normal trading accounts ?. It took me some years to get fully ISAd up but I’m glad that I did, no tax or tax admin to worry about on my investments now !. And SIPPs of course are even better due to their IHT advantages and ability to invest a much larger amount each year when you are working.

But perhaps you know all this already ?. If so then my apologies.

But if you haven’t got this tax stuff sorted already then doing so could be the most important investment decision that you make all year.

ATB

Pref

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Re: Share buybacks: a beautiful thing

#246884

Postby scrumpyjack » August 25th, 2019, 1:17 pm

It is certainly true that buybacks do not create an unavoidable tax event for the private shareholder holding in a non tax sheltered account whereas both dividends are capital returns do (income tax or CGT)

I was happy that Whitbread chose a tender buyback so that shareholders had the choice, but that is only really viable for a very large buyback.

Buybacks obviously increase the percentage share of the company each remaining share represents.

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Re: Share buybacks: a beautiful thing

#246895

Postby Steveam » August 25th, 2019, 2:42 pm

Hi PrefInvestor, I should have made clear that both SIPP and ISA are maxed out - pension fund is now above LTA (I’ve taken the 25% tax free) and I make max annual contribution to my ISA. There is little chance of getting the unprotected accounts to anything sensible (a nice problem to have).

Best wishes,

Steve

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Re: Share buybacks: a beautiful thing

#246899

Postby BusyBumbleBee » August 25th, 2019, 3:28 pm

Steveam wrote:Hi PrefInvestor, I should have made clear that both SIPP and ISA are maxed out - pension fund is now above LTA (I’ve taken the 25% tax free) and I make max annual contribution to my ISA. There is little chance of getting the unprotected accounts to anything sensible (a nice problem to have). -- Best wishes, Steve

There is another tax advantaged saving product offered by major insurers insurance : insurance bonds. This is one of the better ones https://www.nfumutual.co.uk/investments ... flexibond/

Explore this link - there are loads of PDFs - and then see if it is right for you.

Essentially you can choose which fund(s) you want to invest in (and there are many) and how much you want to put in (lump sum or monthly) and how much (the maximum is quite high) and : later - how much and with what frequency you wish to withdraw.

The beauty is that you can withdraw 5% annually for 20 years without paying any tax as this 5% is considered return of capital. thereafter income is taxed as basic rate.

Worth a look in detail as this one has done really well over many decades. Other Fools have mentioned Wesleyan as a good provider as well. I love mine which has performed well and pays a base load every month - sufficient to run my house etc.


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