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Domino Pizzas bought back own shares yesterday

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Melanie
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Domino Pizzas bought back own shares yesterday

#139742

Postby Melanie » May 18th, 2018, 7:29 am

Just read this:

http://www.4-traders.com/DOMINO-S-PIZZA ... -26610507/

Anyone have any ideas as to why they did this? I'd always been of the view that this was typically done by (reasonably) cash-rich firms looking to help along their ailing share price. (The US tech firm I work for, which has been in the news a lot lately, is currently undertaking a similar action).

Mel and I are shareholders in DOM. We bought them in March, after much research, into what looks like a healthy company. Their share price has certainly grown since then (by 8-10% ?).

So why on earth would they do this?

Concerned, Matt and Mel

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Re: Domino Pizzas bought back own shares yesterday

#139744

Postby Lootman » May 18th, 2018, 7:36 am

Buying in a company's shares is not usually associated with a company that is "ailing" but quite the opposite. An ailing company is more likely to do the opposite and do a rights issue. Buybacks are a sign of confidence in the future, and reflects a healthy cashflow. As such far from being worried about this, I think it is something to celebrate.

My only concern with buying in stock is when a company borrows to do that. Can be risky if markets then fall.

Now there are some here who would prefer the cash be used as a special dividend. But that is a taxable event and therefore not welcome by others. Whereas buying in shares typically raises the share price, along with earnings-per-share, whilst leaving the decision of when to invoke a tax event to the investor.

I've owned this share for a number of years and it has treated me well. I have no problem with this decision. Such buybacks typically need shareholder approval indicating that I am not alone here.

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Re: Domino Pizzas bought back own shares yesterday

#139749

Postby GoSeigen » May 18th, 2018, 7:58 am

Melanie wrote:Just read this:

http://www.4-traders.com/DOMINO-S-PIZZA ... -26610507/

Anyone have any ideas as to why they did this? I'd always been of the view that this was typically done by (reasonably) cash-rich firms looking to help along their ailing share price. (The US tech firm I work for, which has been in the news a lot lately, is currently undertaking a similar action).

Mel and I are shareholders in DOM. We bought them in March, after much research, into what looks like a healthy company. Their share price has certainly grown since then (by 8-10% ?).

So why on earth would they do this?

Concerned, Matt and Mel


I've not looked at the specifics of this company at all, but the general investment environment is one of huge surpluses of capital and poor opportunities for generating a return. Everyone is offloading their spare capital onto others whereever possible. Thus we see banks offering very cheap lending, savers accepting very low deposit rates, companies like Aviva proposing capital reductions and many others buying shares in the market.

As I said I don't know the specifics of DOM, but look at their balance sheet and the statements they have made about the buybacks and in their reports to see if they give the impression of having excess capital.


"Boosting share price" has little to do with it IMO. A company cannot boost its market valuation by buying a few shares. The price will go up but the number of issued shares goes down, so the company is valued the same. It is the underlying state of the business, general economic conditions and investor sentiment which set the price of the shares.

BTW 10% gain in 3 months is pure luck. Means nothing more than that purchasers are happy with 0.5% lower yield than they accepted in March. You know that from your bond work. [Absent something specific that has boosted DOM's future profits by 10% in that period.]


GS

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Re: Domino Pizzas bought back own shares yesterday

#139750

Postby Lootman » May 18th, 2018, 8:08 am

GoSeigen wrote:"Boosting share price" has little to do with it IMO. A company cannot boost its market valuation by buying a few shares. The price will go up but the number of issued shares goes down, so the company is valued the same.

I think it is still a factor, at least if the buybacks are large relative to the shares outstanding. From Forbes:

"Further proof for the value of buybacks can be found in the performance of a Goldman Sachs index listed on Bloomberg (ticker:GSTHREPO) which was one of the best performing strategies in recent trading sessions, beating the Standard & Poor’s 500 Index by 50 basis points. It is important to note that many of the companies that have major share repurchasing plans have also raised their quarterly cash dividend rates, adding to the surge in their stock prices. Goldman Sachs estimates that the cash returned to shareholders in 2018 from stock buybacks and dividends will grow to $1 trillion. Repurchase authorizations have been strong, increasing at a rate of 18%. In fact, buybacks of common stocks will account for the largest share of US equity demand during 2018. It is powered by an extraordinarily high ratio of cash to assets on the part of the Standard & Poor's 500.

In facts valuations are rising because buybacks reduce the number of shares outstanding while increasing per share earnings on the remaining stock outstanding.. While dividend increases means higher quarterly cash distributions on shareholdings. The combination is often an infallible plan for higher stock prices. In fact, these goals often take precedence over further capital expenditures of substantially higher compensation.

Apple has the dual benefit of corporate stock repurchases and the increased buying by Warren Buffett’s Berkshire Hathaway of its now largest common stock position in the portfolio. Apple potentially has well over $100 billion in repatriated funds it could use to buyback its stock over the next several years.That would amount to more than 10 percent of its current market cap of $870 billion.

In recent days Cisco announced a $25 billion buyback together with a 14% hike in its cash dividend payout. AbbVie, a biopharmaceutical company set a new $10 million repurchase plan. Boeing s going after $14 billion of stock, equal to 10% of its total shares outstanding. Merck and Oracle both have announced $10 billion buyback plans while Mastercard is going after $4 billion."

https://www.forbes.com/sites/robertlenz ... d1ecd45304

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Re: Domino Pizzas bought back own shares yesterday

#139759

Postby GoSeigen » May 18th, 2018, 8:28 am

Lootman wrote:
GoSeigen wrote:"Boosting share price" has little to do with it IMO. A company cannot boost its market valuation by buying a few shares. The price will go up but the number of issued shares goes down, so the company is valued the same.


I think it is still a factor, at least if the buybacks are large relative to the shares outstanding. From Forbes:



If it's a factor, then it is a factor no matter how big or small the sale of shares to the company.




There is a very important distinction between price (who cares?) and market valuation
= (price) x (shares outstanding)
which is the crucial measure.

My point: any company buying shares just "to boost the price" is foolish to the point of incompetence. Of course the price rises, but exactly in line with the reduction of shares outstanding. Any investor thinking such a price rise indicates some sort of achievement by the company or anyone else is deluding himself.

Restatement of the point: the purchase is not to raise the price of the shares. That is simply a mathematical consequence of the purchase. The individual investor has a higher value to her shares because after the buyback she has a larger equity stake in the company. That's all.

GS

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Re: Domino Pizzas bought back own shares yesterday

#139760

Postby Melanie » May 18th, 2018, 8:30 am

GoSeigen wrote:"Boosting share price" has little to do with it IMO. A company cannot boost its market valuation by buying a few shares. The price will go up but the number of issued shares goes down, so the company is valued the same. It is the underlying state of the business, general economic conditions and investor sentiment which set the price of the shares.
GS

Yes, I agree that a buyback doesn't intrinsically make a firm "more valuable". Only from a supply vs demand perspective I think people can maintain that it sometimes boosts the share price.

I wish I had more time to spend all aspects of the performance of each our holdings. Mel and I tend to use the free data from places like 4-traders, and Google around for extra titbits for the most part.

4-traders does reveal growing turnover, operating profits and dividends:
http://www.4-traders.com/DOMINO-S-PIZZA ... inancials/

so I'm still a bit puzzled as to recent actions.

Matt
Last edited by Melanie on May 18th, 2018, 8:36 am, edited 1 time in total.

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Re: Domino Pizzas bought back own shares yesterday

#139762

Postby Melanie » May 18th, 2018, 8:33 am

GoSeigen wrote:The individual investor has a higher value to her shares because after the buyback she has a larger equity stake in the company. That's all.
GS

Now that is a good point. I'd not looked at it that way, but yes proportion wise it is a good assessment.

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Re: Domino Pizzas bought back own shares yesterday

#139765

Postby Dod101 » May 18th, 2018, 8:37 am

Yes I always view buybacks with some pleasure tinged with a slight cynicism. One point to emphasise is that by reducing the number of shares in issue it reduces the number of shares for which a dividend will need to be paid and this possibly increases the dividend more than would otherwise be the case. In other words, not just earnings per share but dividends per share will increase. Depending on the size of the buyback relative to the issued capital these changes could be quite marginal or not.

My slight cynicism is that some companies reward their execs based on a higher EPS and it may therefore be in their interests to use buybacks to do this. Always worth looking at.

Fundamentally though companies should only buyback their own shares if they are buying at a good price. You can see this most obviously with investment trusts, where they will usually only buy their own shares if they trade significantly below Net Asset Value. To that extent you could say it helps to boost an ailing price. Just like any one of us it does not make sense for a company to buy in its own shares at the top of the market, in fact it is detracting value not adding it.

Dod

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Re: Domino Pizzas bought back own shares yesterday

#139766

Postby Lootman » May 18th, 2018, 8:46 am

GoSeigen wrote:the purchase is not to raise the price of the shares. That is simply a mathematical consequence of the purchase. The individual investor has a higher value to her shares because after the buyback she has a larger equity stake in the company. That's all.

I think that is perfectly true. However buybacks are performed because shareholders like them and it does boost the apparent return on the shares. Put another way buybacks are considered to be one form of "returning cash to shareholders", along with dividends.

To the extent that buybacks are popular with shareholders, companies will continue do them. And if a company hits a slump then it is easier to not do more buybacks than it is to cut the dividend, so it's a more flexible approach to "returning cash".

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Re: Domino Pizzas bought back own shares yesterday

#139768

Postby Dod101 » May 18th, 2018, 8:51 am

I have not studied the Annual Report but there are one or two bits in the Chairman's statement that might be worth mentioning. Share buybacks are not a new feature for Domino's and the £21 million is only part of a £50 million programme for this year, and last year they also bought back their own shares. They obviously have lots of cash because not only are they doing buybacks, they are also increasing their stake in their London franchisee and increasing the dividend by 16.7% at least for the first quarter this year.

Then comes the crunch. They have gone from a net cash position 2 years ago to taking on quite a lot of borrowings and the Report says 'This is a significant development'. In other words a bit of financial engineering. Not necessarily a bad thing because it can boost returns.

Always best to go to the horse's mouth.

Dod

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Re: Domino Pizzas bought back own shares yesterday

#139774

Postby GoSeigen » May 18th, 2018, 9:25 am

Dod101 wrote:Yes I always view buybacks with some pleasure tinged with a slight cynicism. One point to emphasise is that by reducing the number of shares in issue it reduces the number of shares for which a dividend will need to be paid and this possibly increases the dividend more than would otherwise be the case. In other words, not just earnings per share but dividends per share will increase. Depending on the size of the buyback relative to the issued capital these changes could be quite marginal or not.

My slight cynicism is that some companies reward their execs based on a higher EPS and it may therefore be in their interests to use buybacks to do this. Always worth looking at.

Fundamentally though companies should only buyback their own shares if they are buying at a good price. You can see this most obviously with investment trusts, where they will usually only buy their own shares if they trade significantly below Net Asset Value. To that extent you could say it helps to boost an ailing price. Just like any one of us it does not make sense for a company to buy in its own shares at the top of the market, in fact it is detracting value not adding it.

Dod


Dod, all pertinent points.

[EDIT: changed order to match quotes in bold]

Of course div per share increases; that's why the price is higher. However, the market cap (DCF of all cashflows) does not increase. Share price on its own is not a measure of the value of a company!

<i>some companies reward their execs based on a higher EPS</i>: If these schemes are not adjusted for total shares outstanding then shareholders are dumb for passing them in the first place or for passing the buyback resolution without insisting on adjustments to the compensation scheme. At the very least, one would hope the relationship is transparent so that shareholders can take account of it.

If you hold a company's shares and the company in turn is buying its own shares and you continue holding then by your own definition the company is buying at a good price (i.e. you think the price is still not high enough to sell). I have considered this very question with my holdings of BP and LLOY: I have come to the conclusion that I am actually satisfied for those companies to be "reinvesting" my dividends for me at current prices.


GS

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Re: Domino Pizzas bought back own shares yesterday

#139775

Postby GoSeigen » May 18th, 2018, 9:31 am

Melanie wrote:so I'm still a bit puzzled as to recent actions.

Matt


Matt, I am puzzled as to why you are puzzled! The company is doing well (by your judgement/research). It is distributing cash to its shareholders. Where is the puzzle?

GS

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Re: Domino Pizzas bought back own shares yesterday

#139780

Postby Melanie » May 18th, 2018, 10:05 am

GoSeigen wrote:Matt, I am puzzled as to why you are puzzled!

Ha!

GoSeigen wrote: The company is doing well (by your judgement/research). It is distributing cash to its shareholders. Where is the puzzle?

Yeah I know. I just don't why they choose to take this line, rather than pay out a Special Dividend, in the same way that the likes of Morrison and Imperial Brands have both recently announced.

Matt

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Re: Domino Pizzas bought back own shares yesterday

#139786

Postby SalvorHardin » May 18th, 2018, 10:34 am

In addition to buying back shares in order to boost earnings per share, thus making it easier to hit the directors' targets, companies have been known to use buybacks in order to hide the cost (and the dilution of shareholders' interests) of issuing share options to staff.

Companies used to love doing this because the options never appeared as a cost in the profit & loss account, so statutory eps would be artificially inflated. But the dilution would be quite noticeable, so some companies started buying back shares to meet the option grants. They would hold these shares in treasury and use them to meet option grants. Many shareholders would not spot this. The rules have been tightened up in recent years but option-based accounting shenanigans still persist.

In an article in The Washington Post back in 2002, Warren Buffett wrote about how some companies used options to keep pay out of the profit & loss account. The key extract:

1) If options aren't a form of compensation, what are they?

2) If compensation isn't an expense, what is it?

3) And if expenses shouldn't go into the calculation of earnings, where in the world should they go?


https://www.washingtonpost.com/archive/ ... 5bf3508d8/

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Re: Domino Pizzas bought back own shares yesterday

#139789

Postby tjh290633 » May 18th, 2018, 10:41 am

Investment Trusts use share buybacks as a means of controlling the discount on their shares, and may release them back into the market if they go to a premium.

When companies do it, it is often claimed to be returning value to shareholders. In my view this is better done by increasing ordinary dividends or by paying special dividends. Other methods can be likened to burning fivers, for all the good it may do.

TJH

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Re: Domino Pizzas bought back own shares yesterday

#139807

Postby Dod101 » May 18th, 2018, 12:06 pm

GoSeigen wrote:
Of course div per share increases; that's why the price is higher. However, the market cap (DCF of all cashflows) does not increase. Share price on its own is not a measure of the value of a company!

If you hold a company's shares and the company in turn is buying its own shares and you continue holding then by your own definition the company is buying at a good price (i.e. you think the price is still not high enough to sell). I have considered this very question with my holdings of BP and LLOY: I have come to the conclusion that I am actually satisfied for those companies to be "reinvesting" my dividends for me at current prices.


The dividend per share does not 'of course' increase. It might but not necessarily; the company might decide to hold the dividend and so the dividend costs it less in the aggregate. It will probably be a marginal increase in any case, unless it is a truly massive buyback (relative that is to the total number of shares in issue) I do not think I ever claimed that the market cap increased and in any case it is usually used as a definition for the aggregate price of all outstanding shares, so it might even fall because there is no pro rata or automatic increase in the share price as a result of a share buyback.

On your second point above, I think with respect that your comment is just a bit too glib. I will sometimes continue to hold a share even if I think the price is a bit 'toppy' because I might think that events will soon catch up with it. But I would hope that the FD will have done his own calculations and decided if his company's shares are worth buying in at the current market price because if it is known that the Company is standing in the market with an open chequebook, prices might rise anyway so he has to be especially careful.

Dod

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Re: Domino Pizzas bought back own shares yesterday

#139836

Postby toofast2live » May 18th, 2018, 2:12 pm

The trouble with buy backs is that company boards are like private punters: they buy at high prices and don’t buy at low prices.

Were boards of directors buying back zillions of shares in the bleak mid winter of 2008 when prices were at their juiciest since 2003? No, of course not because they’d spent shedloads at peak prices in 2007.

And they’re at it again. A great sign of a market topping out.

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Re: Domino Pizzas bought back own shares yesterday

#139854

Postby Dod101 » May 18th, 2018, 3:54 pm

I am inclined to agree with toofast2live. I doubt that Directors think sufficiently about the value they are buying when they buy in their own shares, as I have already more or less said. Trouble is when they are throwing off cash that is likely to be the time when they are trading most profitably so you could say it is a built in defect.

In 2008 in fact most that were cheap were battening down the hatches.

Dod

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Re: Domino Pizzas bought back own shares yesterday

#139989

Postby Melanie » May 19th, 2018, 1:02 pm

Thanks for all comments,

All remarks appreciated. Everyone has said things which I'd previously not appreciated. I can now see that DOMs recent buyback episode was probably an exercise in cash redistribution....I would have preferred a special dividend (accepted this to liable to tax), but regardless they seem in good shape, and hence this event has been removed from any hypothetical worry list which I may have had! :lol:

Matt

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Re: Domino Pizzas bought back own shares yesterday

#140072

Postby ap8889 » May 19th, 2018, 8:03 pm

A share buyback is far preferable from a tax point of view than a special dividend.

A special dividend will lead to unanticipated additional income, potentially subject to income tax (if held outside a Sipp or ISA wrapper), which can screw up ones tax planning. Imagine an unexpected special pushing you over the threshold for the brutal tax hit that is the pensions annual allowance taper. Not cool.

The additional capital value of your shares in the company after a buyback, well, that can be realized partially or wholly at a convenient time of the shareholders choice, all the better to make use of the sometimes overlooked CGT allowance.

Specials are just about the worst way of returning money to shareholders. I hate them.


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