Share buybacks are very much “in fashion ” as a way of – to use a misnomer beloved of chief executives and chairmen – returning cash to shareholders.
It’s a misnomer because no cash is actually returned to shareholders in a share repurchase programme.
Sure, plenty of cash is being spent but instead of being paid out in the form of dividends to shareholders, the dosh is spent buying back the company’s shares in the market and either holding them in the treasury, where they can be reissued at a later date or cancelling them altogether.
Either way, the laws of supply and demand – assuming they have not been repealed in this weirdest of markets – dictate that fewer shares in the market should lead to a rise in the share price, so shareholders should at least derive some benefit from the share repurchases.
For those of you (like me) who did not have a classical education, cui bono is a Latin phrase that means “who benefits?” In the context of share repurchases, who benefits from share buybacks?
Well, as we’ve seen above, shareholders should benefit from a share price increase, all other things being equal (which they never are).
Senior managers and executives on long-term incentive plans (LTIPs) who are set to receive shares – sometimes for free, sometimes at the cost of exercising options – also benefit without really lifting a finger, if the share price increases as a result of the share buyback.
Senior managers and executives on LTIPs whose bonuses are triggered by the share price rising by a certain amount are also probably big fans of share buybacks, especially if the alternative of dividend payouts would cause their accountants a bit of inconvenience on the tax front.
Well, I don’t know about “else” but our old friends “senior managers and executives on LTIPs” whose bonuses and rewards might be triggered by an increase in earnings per share are probably keen on share buybacks; after all, if earnings stay the same but the number of shares in issue goes down, earnings per share automatically go up without senior management having to do a thing.
A good ploy if the shares are undervalued
All that being said, while share buybacks are generally more of a boon to senior management than they are to rank and file shareholders, they can be a good move in certain circumstances. The trick is to buy back the shares when they are undervalued, although, in my experience, chief executives always think their shares are undervalued.
It’s also a good way of spending money when the company can’t think of a better use for it, which is often the way with mature companies that throw off prodigious amounts of cash. Companies such as Diageo PLC (LON:DGE), Unilever PLC (LON:ULVR) and BP PLC (LON:BP.) have all announced massive share buybacks this year.
In many cases, spending a billion quid or so on share buybacks is preferable to a vainglorious acquisition; loads of research papers have concluded that most blockbuster acquisitions destroy value rather than create it.
Over the last five years (according to our data sources), the big players in the buyback game among the FTSE 350 are as follows.
|Company||Ticker||Market capitalisation (£mln)||Share buybacks over 5 years (£mln)||Buybacks as % of market cap|
|Standard Life Aberdeen PLC||LON:ADN||5,735||1,758||30.7|
|Rolls-Royce Group PLC||LON:RR.||8,727||856||9.8|
|Man Group PLC||LON:EMG||2,364||209||8.8|
|Micro Focus International plc||LON:MCRO||1,589||132||8.3|
|NatWest Group PLC||LON:NWG||21,913||1,364||6.2|
|QinetiQ Gtoup PLC||LON:QQ.||1,885||107||5.7|
|WPP Group PLC||LON:WPP||11,630||588||5.1|
|AVI Global Trust PLC||LON:AGT||1,006||50||4.9|
I’ll leave it to the reader to identify which of the above companies have bought back shares because they are undervalued and which have bought them for other reasons.