Scottish Mortgage and other investment trusts buying back shares is rational; for others, the jury i


Share buybacks seem to be back in fashion among FTSE 350 companies, which given the index is up 19% over the last year, seems odd timing.

Yesterday Royal Dutch Shell PLC (LON:RDSB) joined the gang, announcing it would increase total shareholder distributions to within the range of 20-30% of cash flow from operations.

Now, some of this may be in the form of dividends but JPMorgan, for one, reckons the oil giant will buy back around US$500mln in the third quarter alone.

On the same day, Countryside Properties said it expects to generate at least GBP450mln of surplus cash by September 2023 which will be returned to shareholders via on-market purchases of the company’s own shares.

So, not returning the cash to shareholders at all, although the law of supply and demand does dictate that fewer shares in issue will lead to the value of the remaining shares rising. This by-product, incidentally, makes the directors look good and may even help trigger bonuses in their long-term incentive share plans.

Looking at the latest full-year accounts of the FTSE 350 companies (so the data could be well out of date given companies with end-June will not have released this fiscal 2021 results yet), it seems that 27 have bought back shares equivalent to more than 1% of their current market capitalisation.

A number of these are investment trusts, such as Witan Investment Trust PLC (LON:WTAN) (shares equal to 6.8% of current market cap bought back), JPMorgan American Investment Trust PLC (LON:JAM) (4.05%) and Scottish Mortgage Investment Trust PLC (LON:SMT) (3.12%). The practice also sees to be popular with fund management firms.

Given that the shares of most investment trusts trade below their net asset value per share, it is possible to see why the trusts do it. On top of which, their net asset value per share is fairly easy to calculate whereas with a company such as Hikma Pharmaceuticals PLC (LON:HIK), which has bought back around GBP375mln in shares – equivalent to 6.3% of its current market capitalisation – it is not so easy to categorically determine whether the shares are being bought back on the cheap.

Hikma shares are up 20% over the last shares, suggesting they ain’t so cheap but maybe they have risen because of the vigorous share repurchase programme?

It’s a tricky judgement call and if you want to make your own judgement, the following table might help you. The entries for investment trusts have a grey background.

Share buybacks – the FTSE 350 top 20
Ticker Company Market cap. (GBPmln) Shares repurchased % of market cap bought back
QLT Quilter PLC 2594.4 198 7.63%
ABDN abrdn PLC 6110.4 415 6.79%
PLUS Plus500 Ltd 1370 88.8 6.48%
WTAN Witan Investment Trust PLC 1886 120.4 6.38%
HIK Hikma Pharmaceuticals PLC 5967.4 375 6.28%
PSH Pershing Square Holdings Ltd 5236.6 291.2 5.56%
EMG Man Group PLC 2720.4 128 4.71%
JAM JPMorgan American Investment Trust PLC 1312.7 53.1 4.05%
BGSC BMO Global Smaller Companies PLC 949.5 37.3 3.93%
BKG Berkeley Group Holdings (The) PLC 5899.8 188.6 3.20%
SMT Scottish Mortgage Investment Trust PLC 18876.6 588.5 3.12%
PSON Pearson PLC 6316.1 182 2.88%
FCSS Fidelity China Special Situations PLC 2056.7 58.6 2.85%
WPP WPP Group PLC 11785 290.2 2.46%
GLO ContourGlobal PLC 1298.4 30.4 2.34%
TEM Templeton Emerging Markets Investment Trust PLC 2355.4 50.5 2.14%
VEC Vectura Group PLC 815.3 16.6 2.04%
NXT Next PLC 10620 208.3 1.96%
ATST Alliance Trust PLC 3159.9 59.8 1.89%
MNG M&G PLC 5973.2 105 1.76%


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