How best to return cash to shareholders?

[tjh290633]

Moderator Message:
Split off from this thread. - Chris

and they say:

"We are increasing our share buyback to £1 billion1 as part of our commitment to return at least £4 billion to ordinary shareholders. We will update further on our capital return and dividend plans at our full year results in March 2022."

So we may be in line for a special dividend (and share consolidation?) next year.

I would far prefer them just to give the money to we shareholders, rather than pratt about with share buybacks. If they wish to reduce the share capital, have a tender offer.

TJH

[scrumpyjack]

and they say:

"We are increasing our share buyback to £1 billion1 as part of our commitment to return at least £4 billion to ordinary shareholders. We will update further on our capital return and dividend plans at our full year results in March 2022."

So we may be in line for a special dividend (and share consolidation?) next year.

I would far prefer them just to give the money to we shareholders, rather than pratt about with share buybacks. If they wish to reduce the share capital, have a tender offer.

TJH

Agree a tender offer is the best option. It would be crazy to hand the capital proceeds of business disposals out to shareholders as income dividends.
The other alternative is a capital distribution to shareholders.

[dealtn]

and they say:



So we may be in line for a special dividend (and share consolidation?) next year.

I would far prefer them just to give the money to we shareholders, rather than pratt about with share buybacks. If they wish to reduce the share capital, have a tender offer.

TJH

Agree a tender offer is the best option. It would be crazy to hand the capital proceeds of business disposals out to shareholders as income dividends.
The other alternative is a capital distribution to shareholders.

It might depend on how you define "best". A tender offer is more expensive than a buyback. How is that better? It's not as if this is a small cap with low liquidity and large bid-offer spreads. The ordinary cost of dealing in the shares in the secondary market is minimal, so the justification of providing an alternative to those wishing to sell isn't there.

[Dod101]

I would far prefer them just to give the money to we shareholders, rather than pratt about with share buybacks. If they wish to reduce the share capital, have a tender offer.

TJH

Agree a tender offer is the best option. It would be crazy to hand the capital proceeds of business disposals out to shareholders as income dividends.
The other alternative is a capital distribution to shareholders.

It might depend on how you define "best". A tender offer is more expensive than a buyback. How is that better? It's not as if this is a small cap with low liquidity and large bid-offer spreads. The ordinary cost of dealing in the shares in the secondary market is minimal, so the justification of providing an alternative to those wishing to sell isn't there.

As you must know very well a tender offer is offering a guaranteed price for the shares irrespective of what the market is doing and is more or less brought to the door of the shareholder and with no dealing costs. To that extent, it is 'better' for the shareholder, certainly the small shareholder, but as you say, for the company there are costs involved which do not arise if they are simply buying in the market.

Dod

[dealtn]

Agree a tender offer is the best option. It would be crazy to hand the capital proceeds of business disposals out to shareholders as income dividends.
The other alternative is a capital distribution to shareholders.

It might depend on how you define "best". A tender offer is more expensive than a buyback. How is that better? It's not as if this is a small cap with low liquidity and large bid-offer spreads. The ordinary cost of dealing in the shares in the secondary market is minimal, so the justification of providing an alternative to those wishing to sell isn't there.

As you must know very well a tender offer is offering a guaranteed price for the shares irrespective of what the market is doing and is more or less brought to the door of the shareholder and with no dealing costs. To that extent, it is 'better' for the shareholder, certainly the small shareholder, but as you say, for the company there are costs involved which do not arise if they are simply buying in the market.

Dod

Yes I was referring to the cost from the company's perspective. From that perspective it is difficult to argue the more expensive route is the best. Given it is the (Directors of the) Company that makes the decision on which of the alternatives to follow you can see why buybacks are more frequent than tenders, particularly where liquidity and trading frictional costs are low.

[GoSeigen]

and they say:

"We are increasing our share buyback to £1 billion1 as part of our commitment to return at least £4 billion to ordinary shareholders. We will update further on our capital return and dividend plans at our full year results in March 2022."

So we may be in line for a special dividend (and share consolidation?) next year.

I would far prefer them just to give the money to we shareholders, rather than pratt about with share buybacks. If they wish to reduce the share capital, have a tender offer.

TJH

Disingenuous. They are returning the money to us shareholders. They are offering shareholders who wish to reduce their exposure (or raise some cash) £1bn of liquidity to do so. That is what the announcement means. Anyone who wishes to reduce their exposure interest in the company can and should do so (and those shareholders in aggregate will receive a payout of £1bn).

Tender offer costs are far higher than those for purchase on the exchange (and theoretically the price should be the same). If the company is going to be listed then why not use the exchange for its proper purpose?


GS

[scrumpyjack]

It might depend on how you define "best". A tender offer is more expensive than a buyback. How is that better? It's not as if this is a small cap with low liquidity and large bid-offer spreads. The ordinary cost of dealing in the shares in the secondary market is minimal, so the justification of providing an alternative to those wishing to sell isn't there.

As you must know very well a tender offer is offering a guaranteed price for the shares irrespective of what the market is doing and is more or less brought to the door of the shareholder and with no dealing costs. To that extent, it is 'better' for the shareholder, certainly the small shareholder, but as you say, for the company there are costs involved which do not arise if they are simply buying in the market.

Dod

Yes I was referring to the cost from the company's perspective. From that perspective it is difficult to argue the more expensive route is the best. Given it is the (Directors of the) Company that makes the decision on which of the alternatives to follow you can see why buybacks are more frequent than tenders, particularly where liquidity and trading frictional costs are low.

What the directors should be doing is considering what is in the best interests of shareholders generally. Obviously it is in shareholder's interests not to waste money. So long as the company can return the unneeded capital to shareholders by buying back shares on the market that is, IMO, the best thing to do so long as the shares can be bought back without distorting the market price. Shareholders who want cash can sell some or all of their shares on the market. Shareholders who retain their shares benefit from subsequently owning a higher percentage of the company. No shareholder is forced into a 'tax event' by the buybacks, either income or capital. If the market supply of shares for buyback is insufficient then a tender may be appropriate.

[csearle]

They are returning the money to us shareholders.

Not great though is it. In the case of a special the cash just lands into your account - kerplunk. In the case of a share buyback nothing particularly noticeable happens to the share price and to get the same amount of cash you have to sell your shares (almost certainly not following some clear jump up in value equivalent to the special) and have to pay a transaction fee for the privilege. No if a firm has cash to return to me I want it in my account directly so that I can see it arrive and choose to invest it where I want.

Chris

[Bouleversee]

T

They are returning the money to us shareholders.

Not great though is it. In the case of a special the cash just lands into your account - kerplunk. In the case of a share buyback nothing particularly noticeable happens to the share price and to get the same amount of cash you have to sell your shares (almost certainly not following some clear jump up in value equivalent to the special) and have to pay a transaction fee for the privilege. No if a firm has cash to return to me I want it in my account directly so that I can see it arrive and choose to invest it where I want.

Chris

The trouble is that these specials don't always amount to what they initially seem to be. I acquired shares in Melrose as a result of their takeover of GKN and this year they paid a special dividend but then they had a share consolidation and what it comes down to if my calcs. are correct (I need to go back and check on the value of the shares they took over) it seemed to me that I had simply been lending them my money free of interest, enabling them to pay the directors large bonuses. I shall be absolutely delighted if someone proves I am talking nonsense but OTOH I came across this today:
https://uk.news.yahoo.com/even-rising-3 ... 07289.html.

[scrumpyjack]

I invest in companies in the expectation that they will increase the value of my investment over the years. I don’t invest in them in the hope they will return my own capital to me (kerplunk) whilst calling it a ‘dividend’ and then (kerplunk) reduce the number of shares I hold so I am in the same position as if I had simply sold some of shares, except that I had no choice in the matter and they have landed me with a tax charge. I am deluding myself if I classify that ‘dividend’ as income in my spreadsheet and think how well my dividends are growing.

No, if I want a warm glow of satisfaction I would rather drink a few glasses of a good red wine than engage in such self delusion!

If anything the company share buybacks will prop up the share price as the market knows there is that large buyer in the market. So if you want some of your own capital back, that might be a good time to sell some of your holding. You can still put it in the ‘income’ column in your spreadsheet if that makes you feel better

[Lootman]

I invest in companies in the expectation that they will increase the value of my investment over the years. I don’t invest in them in the hope they will return my own capital to me (kerplunk) whilst calling it a ‘dividend’ and then (kerplunk) reduce the number of shares I hold so I am in the same position as if I had simply sold some of shares, except that I had no choice in the matter and they have landed me with a tax charge.

Yes for me the overriding factor is that I prefer not to have involuntary tax events. And if I have to have them then they should be deferred for as long as possible.

Otherwise I think it doesn't matter that much, although I prefer to try and invest in companies which can get a better return on capital than I can.

[csearle]

If it was a given that the share price would be "propped up" by the share buyback then maybe that would indeed be better. But it isn't, at least not in any predictable way. The share price appears to me to move with little reference to the share buybacks. So for me (I admit that my holdings are tax sheltered so that dividends for tax purposes are not a negative thing) a dividend is the income I'm looking for; a share buyback is simply lost income. C.

[Lootman]

If it was a given that the share price would be "propped up" by the share buyback then maybe that would indeed be better. But it isn't, at least not in any predictable way. The share price appears to me to move with little reference to the share buybacks. So for me (I admit that my holdings are tax sheltered so that dividends for tax purposes are not a negative thing) a dividend is the income I'm looking for; a share buyback is simply lost income. C.

What I have seen happen is that the share price responds positively to the announcement of a share buyback. This doesn't seem unreasonable since it constitutes new information about a new stream of demand for the shares over the period in question.

What is less likely is that the actual purchases themselves see an immediate uptick in prices. Not least because those who enact those stock repurchases might be more tempted to move into the market when sentiment is weak rather than strong.

Of course there is no way of measuring the effect of stock buybacks since we do not know where the share price would be without those buybacks. Even if a share goes down in price over the period of the buybacks, it might have gone down even more without them.

[Dod101]

They are returning the money to us shareholders.

Not great though is it. In the case of a special the cash just lands into your account - kerplunk. In the case of a share buyback nothing particularly noticeable happens to the share price and to get the same amount of cash you have to sell your shares (almost certainly not following some clear jump up in value equivalent to the special) and have to pay a transaction fee for the privilege. No if a firm has cash to return to me I want it in my account directly so that I can see it arrive and choose to invest it where I want.

Chris

But with respect they are not returning cash to you, they are returning cash to the shareholders in general, as a class. The company is not saying 'Let's return £x to Chris', they are saying 'Let's return £x to shareholders'. The fact that you are one is not particularly relevant to them.

Quite different from dividends. That seems to be difficult for shareholders to understand.

Dod

[GeoffF100]

If it was a given that the share price would be "propped up" by the share buyback then maybe that would indeed be better. But it isn't, at least not in any predictable way. The share price appears to me to move with little reference to the share buybacks. So for me (I admit that my holdings are tax sheltered so that dividends for tax purposes are not a negative thing) a dividend is the income I'm looking for; a share buyback is simply lost income. C.

Other things being equal, a share buy back should have precisely no effect on the share price.

If a company pays a dividend, the share price should fall by the value of the dividend on the xd date. That happens because the value of the company falls by the value of the dividends paid out. The investor, however, receives the dividend. Other things being equal, the new lower value of the company plus the value of the dividends paid out is the same as the value of the company before the share went xd. No money is created or destroyed by paying out a dividend.

If the company instead buys back shares to the value of the dividend, the money again disappears from the company's balance sheet, and the company is worth less: exactly what it would have been if it had paid out a dividend. There are now, however, less shares in issue. Again, no money has been created and destroyed. The value of an investor's shareholding is worth exactly what it was before the buy back. He is neither richer nor poorer, but the money has disappeared from the company balance sheet, as it would do if a dividend had been paid.

If a company cannot invest money to generate at least the same return as the market, it should return money to shareholders. That does not always happen, however. I would much rather have buy backs than dividends, because I do not have to pay tax on them.

[csearle]

But with respect they are not returning cash to you, they are returning cash to the shareholders in general, as a class. The company is not saying 'Let's return £x to Chris', they are saying 'Let's return £x to shareholders'. The fact that you are one is not particularly relevant to them.

Quite different from dividends. That seems to be difficult for shareholders to understand.

Yes sorry I was being a bit selfish wasn't I!

Chris

[csearle]

If it was a given that the share price would be "propped up" by the share buyback then maybe that would indeed be better. But it isn't, at least not in any predictable way. The share price appears to me to move with little reference to the share buybacks. So for me (I admit that my holdings are tax sheltered so that dividends for tax purposes are not a negative thing) a dividend is the income I'm looking for; a share buyback is simply lost income. C.

Other things being equal, a share buy back should have precisely no effect on the share price.

If a company pays a dividend, the share price should fall by the value of the dividend on the xd date. That happens because the value of the company falls by the value of the dividends paid out. The investor, however, receives the dividend. Other things being equal, the new lower value of the company plus the value of the dividends paid out is the same as the value of the company before the share went xd. No money is created or destroyed by paying out a dividend.

If the company instead buys back shares to the value of the dividend, the money again disappears from the company's balance sheet, and the company is worth less: exactly what it would have been if it had paid out a dividend. There are now, however, less shares in issue. Again, no money has been created and destroyed. The value of an investor's shareholding is worth exactly what it was before the buy back. He is neither richer nor poorer, but the money has disappeared from the company balance sheet, as it would do if a dividend had been paid.

If a company cannot invest money to generate at least the same return as the market, it should return money to shareholders. That does not always happen, however. I would much rather have buy backs than dividends, because I do not have to pay tax on them.

Yes thank you. In my haste I had overlooked this rather basic fact.

So, the way I see it, from the point of view of the shareholder, a share buyback is still rather an indirect way of getting at "his" money. Instead of just, er, getting it, he hopes that the increased earnings per share will allow his dividend to be maintained, or grow, in a way that it might not have done otherwise. That is too indirect for me I feel.

I appreciate that tax might well influence one's feelings in this regard. So people with tax-sheltered investments would have a different take on it than people troubled by the tax man.

Anyway, thanks, especially for putting me straight.
Chris

[Dod101]

If the company instead buys back shares to the value of the dividend, the money again disappears from the company's balance sheet, and the company is worth less: exactly what it would have been if it had paid out a dividend. There are now, however, less shares in issue. Again, no money has been created and destroyed. The value of an investor's shareholding is worth exactly what it was before the buy back. He is neither richer nor poorer, but the money has disappeared from the company balance sheet, as it would do if a dividend had been paid.

If a company cannot invest money to generate at least the same return as the market, it should return money to shareholders. That does not always happen, however. I would much rather have buy backs than dividends, because I do not have to pay tax on them.

The position is better stated as fewer shares than less shares, but the substantive point is that the investor's shareholding (assuming he has not participated in the buyback) is no longer worth exactly what it was before the buy back. It is now worth rather more than it was before the buyback. It may not be reflected immediately (or ever) in the share price but the fact is that he has now got a larger economic stake in the company than he had before.

Dod

[GeoffF100]

If the company instead buys back shares to the value of the dividend, the money again disappears from the company's balance sheet, and the company is worth less: exactly what it would have been if it had paid out a dividend. There are now, however, less shares in issue. Again, no money has been created and destroyed. The value of an investor's shareholding is worth exactly what it was before the buy back. He is neither richer nor poorer, but the money has disappeared from the company balance sheet, as it would do if a dividend had been paid.

If a company cannot invest money to generate at least the same return as the market, it should return money to shareholders. That does not always happen, however. I would much rather have buy backs than dividends, because I do not have to pay tax on them.

The position is better stated as fewer shares than less shares, but the substantive point is that the investor's shareholding (assuming he has not participated in the buyback) is no longer worth exactly what it was before the buy back. It is now worth rather more than it was before the buyback. It may not be reflected immediately (or ever) in the share price but the fact is that he has now got a larger economic stake in the company than he had before.

Yes, his shareholding is worth exactly what it was before the buy back. (Actually, there will be some costs in executing the buy back, and there will also be share price volatility, but that is just confusing matters.) The company is worth less after the buy back, because it no longer has the money that it spent on the buy back. (Look at the accounts.) On the other hand, there are now less shares in issue, so an investor owns a larger proportion of the company than he did before the buy back. The two factors cancel each other out. Your share holding is worth what it was before. You do not get to have your cake and eat it.

[scrumpyjack]

If the company instead buys back shares to the value of the dividend, the money again disappears from the company's balance sheet, and the company is worth less: exactly what it would have been if it had paid out a dividend. There are now, however, less shares in issue. Again, no money has been created and destroyed. The value of an investor's shareholding is worth exactly what it was before the buy back. He is neither richer nor poorer, but the money has disappeared from the company balance sheet, as it would do if a dividend had been paid.

If a company cannot invest money to generate at least the same return as the market, it should return money to shareholders. That does not always happen, however. I would much rather have buy backs than dividends, because I do not have to pay tax on them.

The position is better stated as fewer shares than less shares, but the substantive point is that the investor's shareholding (assuming he has not participated in the buyback) is no longer worth exactly what it was before the buy back. It is now worth rather more than it was before the buyback. It may not be reflected immediately (or ever) in the share price but the fact is that he has now got a larger economic stake in the company than he had before.

Yes, his shareholding is worth exactly what it was before the buy back. (Actually, there will be some costs in executing the buy back, and there will also be share price volatility, but that is just confusing matters.) The company is worth less after the buy back, because it no longer has the money that it spent on the buy back. (Look at the accounts.) On the other hand, there are now less shares in issue, so an investor owns a larger proportion of the company than he did before the buy back. The two factors cancel each other out. Your share holding is worth what it was before. You do not get to have your cake and eat it.

That is not necessarily the case, because it is only valid if the cash is of equal value in or out of the company. Take Aviva, where business disposals mean they have at least £4 billion of cash sitting in the business for which they do not have a use that will make an adequate return. So either they get 1% or 2% interest on it or they buy back shares which 'return' about 11% in eps or 5% in dividends. They are not going to get that return on cash so it is hugely better for shareholders that they buy back shares at about 405p and that 20p in dividends / 45p in eps can be spread over the remaining shares, as compared with the negative real return on cash. Overwhelmingly shareholders are better off with the cash NOT being in the business.