Share buybacks: a beautiful thing

[tjh290633]

Ok,

What do you propose that businesses will do once they have bought back all the stock that they are legally entitled to do?

Matt

The company has to have the authorisation renewed each year. So they repeat it each year. The problem occurs when their share capital becomes so small that the share price is astronomical, a la Berkshire Hathaway, so they either have to subdivide or issue a different class of share to make them marketable.

If your shares are worth a million quid each, its is going to be hard to sell them.

TJH

[JoyofBrex8889]

Ok,

What do you propose that businesses will do once they have bought back all the stock that they are legally entitled to do?

Matt

They will distribute reserves however they see fit, be that dividends or share repurchase subject to the limits imposed by the governance arrangements of the corporation: usually authority for buybacks is approved at a meeting of shareholders. Directors cannot exceed that authorisation without seeking further approval via a general meeting of shareholders.

So I guess in answer to your question: If they have lots of distributable reserves of cash they can pay a dividend or seek a bigger share repurchase authority. Often the authority will allow up to 10% of shares to be repurchased, so it would be unlikely for the mandate to be exceeded unless the company had a windfall.

[TheMotorcycleBoy]

Re. continued buying back of stock, I thought they were legal requirements in the distribution of the company's ownership, that's all.

So I thought that if the directors continually buyback then they are effectively changing the ownership over the years.

I could be talking complete twaddle of course..... it has happened in the past....

[johnhemming]

There is no reason why a company must buy back some stock.

In my view it is a good thing to do in the right circumstance (when the price is low enough).

[TheMotorcycleBoy]

There is no reason why a company must buy back some stock.

In my view it is a good thing to do in the right circumstance (when the price is low enough).

My view is that in theory it's Ok. That is, stock is undervalued and the firm is cash-rich.

The problem IMHO, is that in the current day the practice is adopted by indebted companies. I fail to see to beauty in the eye of the stockholder, when one's stock is put more in hock (if you'll pardon my pun), and the future direction of the stock being moved to be obedient to a bank, not of my selection, rather than myself.

Matt

[vrdiver]

There is no reason why a company must buy back some stock.

In my view it is a good thing to do in the right circumstance (when the price is low enough).

My view is that in theory it's Ok. That is, stock is undervalued and the firm is cash-rich.

In theory, of course.
However, company directors are not on the board because of their market-timing expertise, but to run the business. In reality, successful investors like Terry Smith (of Fundsmith) have categorically stated that share buybacks, in practice do not benefit shareholders.

Further to my asking JoyofBrexit twice for examples of this so-called beauty, they, nor indeed any poster, has offered any such example.

I'll ask for the third time:

All too often we see on these boards grumpy Fools whinging that a share buyback is taking place. The petulant mutterings usually go something like this: “Buybacks are reducing my dividend.... They used to be illegal...management want their share options to trigger”

They are, of course, entitled to their opinion.

No matter how wrong they are.

Please provide examples to back up your argument.

[BusyBumbleBee]

Further to my asking JoyofBrexit twice for examples of this so-called beauty, they, nor indeed any poster, has offered
any such example.... I'll ask for the third time:

Ok - not a listed company example but a start up.

Original shares 100 of £1. Subsequently split into 1,000 10p shares. There were subsequent rights issues at prices up to about £600 per share. Gradually most of the original investors 'wanted out' and their shares were bought back by the company with the last buy back at about £1,900 per share. Finally the company was sold at a somewhat higher price than £1,900 per share and the remaining investors did really rather well - a very effective buy back which gave a lot of joy to the remaining shareholders.

BUT I cannot remember a single example of shareholders of a mature company benefiting from a buyback. "Returning money to shareholders" - my eye.

[TheMotorcycleBoy]

There is no reason why a company must buy back some stock.

In my view it is a good thing to do in the right circumstance (when the price is low enough).

My view is that in theory it's Ok. That is, stock is undervalued and the firm is cash-rich.

In theory, of course.
However, company directors are not on the board because of their market-timing expertise, but to run the business. In reality, successful investors like Terry Smith (of Fundsmith) have categorically stated that share buybacks, in practice do not benefit shareholders.

Further to my asking JoyofBrexit twice for examples of this so-called beauty, they, nor indeed any poster, has offered any such example.

Totally agree. I merely humouring the JoyOfBrex here, seeing what his comments were regarding debt-management based decisions usurping his strength as an equity owner of his stocks as these beautiful firms continue to swap ownership for compulsory interest charges (in the case of indebted firms).

Matt

[simoan]

Further to my asking JoyofBrexit twice for examples of this so-called beauty, they, nor indeed any poster, has offered any such example.

Sorry, I had switched off from this thread. A great example of buybacks being a thing of beauty - Next plc.

All the best, Si

[TheMotorcycleBoy]

Further to my asking JoyofBrexit twice for examples of this so-called beauty, they, nor indeed any poster, has offered any such example.

Sorry, I had switched off from this thread. A great example of buybacks being a thing of beauty - Next plc.

All the best, Si

My mother-in-law thinks some of their latest range is gorgeous.

[Bouleversee]

Possibly. Might have a look if the s.p. ever recovers to what I paid.

[vrdiver]

Further to my asking JoyofBrexit twice for examples of this so-called beauty, they, nor indeed any poster, has offered any such example.

Sorry, I had switched off from this thread. A great example of buybacks being a thing of beauty - Next plc.

All the best, Si

Thanks Si,
I recall something about the Next board declaring they would only buy back their own shares when they felt they were undervalued. A quick google suggests their approach has not been adopted by others, e.g. https://www.theguardian.com/business/20 ... es-buyback

Share buybacks are for dummies – unless you follow the Wolfson rules
This article is more than 6 years old
Retailer Next was a pioneer in the field and is virtually alone in making this form of distribution of cash work for shareholders

However, one swallow doesn't make a summer. Unless all the HYPers that JoB was referencing were moaning about Next, I still see no evidence to support the concept of share buybacks being "a beautiful thing".

VRD

[Bouleversee]

An article in yesterday's FT points out that only 3 years ago, M&S was buying in its own shares at more than twice the price of this year's 185p rights issue. The s.p. is little more than that now and as you will know it has been ejected from the FTSE. I must be wearing the wrong specs. (unfortunately, the rose-tinted ones have gone missing) because I don't see anything beautiful there. There have been a number of articles in various publications over the past few days, all gloomy about M&S's recovery prospects and some, written by women, were very scathing. Does anyone have a good word to say about them?

I prefer the approach of Next, which I also hold.

[Dod101]

Thanks VRD. There is nothing startling in the article just good common sense but I have long ago come to the conclusion that Boards are not necessarily bereft of it but simply do not follow it. They prefer to see share buybacks as almost like 'I can do better than you', to enhance EPS (for the benefit of their bonus),or almost as a testosterone filled act of bravado. Few Boards seem to be able to judge the real value of their shares and from that judge when is a good time to be buying in their shares.

As Next has shown, it can be done and can be of great value to shareholders but, as the article says it needs iron discipline.

Dod

[dealtn]

An article in yesterday's FT points out that only 3 years ago, M&S was buying in its own shares at more than twice the price of this year's 185p rights issue. The s.p. is little more than that now and as you will know it has been ejected from the FTSE. I must be wearing the wrong specs. (unfortunately, the rose-tinted ones have gone missing) because I don't see anything beautiful there. There have been a number of articles in various publications over the past few days, all gloomy about M&S's recovery prospects and some, written by women, were very scathing. Does anyone have a good word to say about them?

I prefer the approach of Next, which I also hold.

Positive cash flow of around £500m a year over each of the last 4 years. Not bad for a company with a market cap <£4bn. Given that the pension fund is in surplus (and 2/3 hedged against interest rates, inflation and longevity) such that further contributions aren't considered necessary (as agreed with the trustees), and that debt is reducing (has fallen in each of the last 5 years), I think there are a number of "good words" that can be said about them.

[BusyBumbleBee]

I think there are a number of "good words" that can be said about them.

I would only use choice words to describe M&S

[tjh290633]

Interesting that, on the day that Lloyds Banking stopped their buy-back programme, the share price rose by 4.3%.

Coincidence?

TJH

[Lootman]

Interesting that, on the day that Lloyds Banking stopped their buy-back programme, the share price rose by 4.3%.

Coincidence?

Probably. Citibank shares were up about 4% last night on Wall Street, and they plan to buy back 10% of their entire share capital in the next year.

In fact all the banks are up over the last 24 hours. The yield curve has steepened, which is good for margins.

[Bouleversee]

I was amazed to see all the bank shares shoot up this a.m. after yesterday's figures re the additional PPI claims. I will never understand the stock market.

[TheMotorcycleBoy]

Interesting that, on the day that Lloyds Banking stopped their buy-back programme, the share price rose by 4.3%.

Coincidence?

Probably. Citibank shares were up about 4% last night on Wall Street, and they plan to buy back 10% of their entire share capital in the next year.

In fact all the banks are up over the last 24 hours. The yield curve has steepened, which is good for margins.

I think it's because the market is more positive over Brexit/EU prospects, due to recent defeats of the executive in the HoC. Didn't lots of £ based (domestic) stocks also rise? Since I noted that Legal and general (LGEN) rose by 3.09%, Persimmon by 2.79% (PSN).

Whereas multinationals Unilever (ULVR), Diageo(DGE) and Relx(REL) all fell, with the rise of sterling.

FWIW, I think by and large the market place ignores buy-back programmes, further underscoring their general pointlessness. It (the market) seems far more interested in currency fluctuations, interest rate trends, ongoing growth prospects etc.