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Share buybacks vs Dividends

Analysing companies' finances and value from their financial statements using ratios and formulae
TheMotorcycleBoy
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Re: Share buybacks vs Dividends

#447513

Postby TheMotorcycleBoy » October 3rd, 2021, 3:58 pm

GoSeigen wrote:
TheMotorcycleBoy wrote:Now that I've proved to myself to that a firm can choose to BB forever, what about shareholder value? So hypothetically a firm can buyback 50% of their stock, as a cash returning vehicle, if they are high quality firm. Then what? Well the consequence of the 50% BB is a doubling of EPS (good news for execs) and the doubling of earnings yield. We then wait for the share price to double, and when it does I sell, make a 100% profit on my shares, then the firm issue a 2-to-1 stock split, and the SP halves, I buy the same quantity of shares back. This all sounds great but in the real world I'm at the whims of the market place to rerate the shares which in a world of uncertainty may never happen, and even it does I have to time the market correctly to benefit from the dividend-equivalence suggestion. As far as I'm concerned this is clearly a-bird-in-hand decision for me favouring the instant cash dividend option, and unlike dividends; in both the initial buyback by the firm and when I sell/rebuy brokers make money on fees and spreads.

I think you've made it a bit more complicated there than necessary.

Not really. GS, when I say cash, I mean cash right here in my hand, or at least funds in an account. The thought experiment is necessary to illustrate that when a firm "returns cash in a div" the cash obtained is tangible and instant. This is not so in a buyback since to extract cash the owner will need to sell at a given price to realise any such tangible equivalence. And whether this occurs profitably is at the whims of the market. When people talk about cash they are referring to a medium of highest liquidity in their location. Not to a hypothetical uncertainty.

When you look at the position of all the shareholders it instantly becomes clear that in purchasing (say) 5% of their shares the company has returned cash to them

No it does not. It means that the company has spent a quantity equal to 5% of their previous market capitalisation with members of the financial sector. Whether all the shareholders see a sum of cash proportionate to their individual holding value is an entirely different proposition.

If I can't see a numerical increase in an account, I can't see any cash being returned. I'm pretty sure I made this apparent earlier. A 5p dividend is an extra 5p in my account; a share buyback executed using an identical sum of money, is not guaranteed to raise the SP by 5p. And indeed if it did friction would occur on the part of a owner attempting to realise this sum.

I'm getting the distinct impression that you regard for example ULVR spending €3B buying back its stock, somehow results in all holders instantly acquiring more to the value of €3B x whatever fraction of ULVR's market capitalisation in their accounts. That doesn't happen. But it would if the cash was returned by way of a div payout of that amount.

Don't forget your earlier remark
that is no more true than if the company pays the same amount to shareholders in dividends year after year. The two are interchangeable AFAICS.

My bold. I can only assume my understanding of words "cash" and "interchangeability" are different from that many other investors.

What about all those shareholders who want to dispose of their shares?

Strawman. Holders can sell whenever there is sufficient buyers, regardless of any div or BB policy.

Matt

TheMotorcycleBoy
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Re: Share buybacks vs Dividends

#447514

Postby TheMotorcycleBoy » October 3rd, 2021, 4:04 pm

You also stated this in your post:
GoSeigen wrote:reduced the total shares outstanding by 5%.

which obviously sounds like good news since EPS will be boosted upwards by commensurate amount, which will hopefully spell better returns in the future for the shareholder. However, in the case of radical uncertainty, that's not guaranteed. A pandemic may get in the way, or the firm could then suffer a Carrillion style catastrophe in which the SP falls to zero. So in the such possibilities, again a dividend would seem preferrable.

Matt

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Re: Share buybacks vs Dividends

#447567

Postby 1nvest » October 3rd, 2021, 7:51 pm

TheMotorcycleBoy wrote:However, sustainability aside, firstly it seems very clear that share buybacks are a poor substitute for cash dividends in terms of certainty, secondly any advantages they may possess are enjoyed by a very small section of society; corporate execs, HNWIs and financial agents.

?

As a example, FCIT bought back around 7% of shares in 2009 (market lows) when its share price was at a discount to NAV. Such actions should benefit all shareholders. In other years when at a NAV or a premium to NAV a regular/higher dividend might be paid instead.

Flexibility on paying a dividend or not and using the money productively, irregular dividends, could be more productive than striving to maintain/pay more in dividends each year even if money had to be borrowed to do so.

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Re: Share buybacks vs Dividends

#447579

Postby Dod101 » October 3rd, 2021, 8:26 pm

TheMotorcycleBoy wrote:
GoSeigen wrote:
TheMotorcycleBoy wrote:Another concern of mine regards buybacks, is that surely if they year-on-year, more than mop up the dilution caused by employee stock awards, then I assume that the policy of "returning capital to the shareholders" using buybacks is unsustainable. Won't a point eventually be reached where there is no more stock to buy back, or won't a point be reached where a legal minimum of stock (if such a limit exists) left in the market is reached? I accept that that time maybe far away, but given many public companies' penchant for buybacks it seems like a reasonable enough query.

thanks Matt


No, that is no more true than if the company pays the same amount to shareholders in dividends year after year. The two are interchangeable AFAICS. Don't forget the number of shares and therefore their price are notional for all intents and purposes and can be adjusted at the whim of the shareholders.


GS

I'm not quite clear about what you are saying here GS. I'll be more direct. Is it possible for a company to execute numerous campaigns of buybacks such that ultimately the company has only one single share outstanding and available for transaction in the market place?

Matt


I am not sure that that could happen with a publicly quoted company. I think it would lose its quoted status long before that happened. In any case in a company's Articles of Association they will require a minimum number of shares in issue specified. And anyway no shareholders' meeting for a public company is going to sanction that possibility even if the listing authorities had not jumped in by then. It is an entirely unrealistic scene and is not going to happen, not even in theory. And of course the other thing is that they will most probably have run out of distributable reserves long before then anyway.

Dod

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Re: Share buybacks vs Dividends

#447601

Postby tjh290633 » October 3rd, 2021, 10:56 pm

1nvest wrote:As a example, FCIT bought back around 7% of shares in 2009 (market lows) when its share price was at a discount to NAV. Such actions should benefit all shareholders. In other years when at a NAV or a premium to NAV a regular/higher dividend might be paid instead.

In fact FCIT and other ITs operate a discount control strategy. When at a discount they buy shares in the market and when at a premium they sell shares in the market. From page 33 of their latest Annual Report:

Discount/premium
Over many years we have consistently applied a share “buyback” policy.
Under this policy we buy back FCIT shares for the benefit of shareholders
where we see value and, importantly, in pursuit of a sustainably low
deviation between the share price and NAV per share in normal market
conditions. The policy and the levels within which it has operated have
continually been reviewed with the aim of achieving the long-held
aspiration of the shares trading at or close to NAV. Shares held in treasury
can be sold, or new shares issued, in order to satisfy shareholder demand
and, conversely, to moderate the premium to which the share price can
rise in relation to the NAV per share. The Board reviews the discount or
premium levels at each meeting. Information on the outcome from this
policy can be found on page 5.

and on page 5:
Company rating and efficiency
Your Company issued shares in both 2018 and 2019 and started the
year at a premium rating of 1.5%. Our rating deteriorated in the first
half of the year in the face of the pandemic and we moved to a
discount as demand for our shares diminished and equity markets
dropped sharply. We bought back a total of 6m shares into treasury
during the year as part of our commitment towards a sustainably low
deviation between the share price and NAV. The discount averaged
6.1% over 2020 and ended the year at 5.4%.


TJH

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Re: Share buybacks vs Dividends

#447667

Postby 1nvest » October 4th, 2021, 10:25 am

tjh290633 wrote:
1nvest wrote:As a example, FCIT bought back around 7% of shares in 2009 (market lows) when its share price was at a discount to NAV. Such actions should benefit all shareholders. In other years when at a NAV or a premium to NAV a regular/higher dividend might be paid instead.

In fact FCIT and other ITs operate a discount control strategy. When at a discount they buy shares in the market and when at a premium they sell shares in the market. From page 33 of their latest Annual Report:

Discount/premium
Over many years we have consistently applied a share “buyback” policy.
Under this policy we buy back FCIT shares for the benefit of shareholders
where we see value and, importantly, in pursuit of a sustainably low
deviation between the share price and NAV per share in normal market
conditions. The policy and the levels within which it has operated have
continually been reviewed with the aim of achieving the long-held
aspiration of the shares trading at or close to NAV. Shares held in treasury
can be sold, or new shares issued, in order to satisfy shareholder demand
and, conversely, to moderate the premium to which the share price can
rise in relation to the NAV per share. The Board reviews the discount or
premium levels at each meeting. Information on the outcome from this
policy can be found on page 5.

and on page 5:
Company rating and efficiency
Your Company issued shares in both 2018 and 2019 and started the
year at a premium rating of 1.5%. Our rating deteriorated in the first
half of the year in the face of the pandemic and we moved to a
discount as demand for our shares diminished and equity markets
dropped sharply. We bought back a total of 6m shares into treasury
during the year as part of our commitment towards a sustainably low
deviation between the share price and NAV. The discount averaged
6.1% over 2020 and ended the year at 5.4%.


TJH

Looks to me (from a very quick look - so may be wrong) that across 2018/2019 they sold 3.15 million shares at a average 675p/share, and bought 1.31 million shares at a average 708p/share. IIRC 2018 saw price/NAV at parity for a while (when I suspect they sold), and dips at other times (price discount to NAV) when presumably they bought back some shares. But where such trading detracted value on a price per share basis a.k.a for 1.3 million shares it would have been better to not have traded. But just a £40K 'loss' so in the scale of things a relatively small trading loss.

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Re: Share buybacks vs Dividends

#447680

Postby tjh290633 » October 4th, 2021, 10:56 am

1nvest wrote:Looks to me (from a very quick look - so may be wrong) that across 2018/2019 they sold 3.15 million shares at a average 675p/share, and bought 1.31 million shares at a average 708p/share. IIRC 2018 saw price/NAV at parity for a while (when I suspect they sold), and dips at other times (price discount to NAV) when presumably they bought back some shares. But where such trading detracted value on a price per share basis a.k.a for 1.3 million shares it would have been better to not have traded. But just a £40K 'loss' so in the scale of things a relatively small trading loss.

You need to look at the RNS posts which detail dealings in their own shares. I doubt that they sold at parity, but only when at a reasonable premium. It is the value of the underlying holdings which determine a "loss" or "gain" in such dealings. Do not forget that this is a discount control mechanism.

TJH

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Re: Share buybacks vs Dividends

#447689

Postby tjh290633 » October 4th, 2021, 11:22 am

tjh290633 wrote:
1nvest wrote:Looks to me (from a very quick look - so may be wrong) that across 2018/2019 they sold 3.15 million shares at a average 675p/share, and bought 1.31 million shares at a average 708p/share. IIRC 2018 saw price/NAV at parity for a while (when I suspect they sold), and dips at other times (price discount to NAV) when presumably they bought back some shares. But where such trading detracted value on a price per share basis a.k.a for 1.3 million shares it would have been better to not have traded. But just a £40K 'loss' so in the scale of things a relatively small trading loss.

You need to look at the RNS posts which detail dealings in their own shares. I doubt that they sold at parity, but only when at a reasonable premium. It is the value of the underlying holdings which determine a "loss" or "gain" in such dealings. Do not forget that this is a discount control mechanism.

TJH

Further to that, from the 2020 Annual Report, page 67:

Shares issued by the Company from treasury                 £11,251,000             
Shares repurchased by the Company and held in treasury (£9,276,000)

So they received more from selling shares than they did from buying them back.

The actual number of shares from Note 17, Page 82, was:

Shares repurchased by the Company and held in treasury  1,309,468
Shares sold from treasury (1,650,000)


That is for 2019. In 2020 they did not sell any shares.

TJH

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Re: Share buybacks vs Dividends

#447693

Postby Alaric » October 4th, 2021, 11:37 am

tjh290633 wrote:In fact FCIT and other ITs operate a discount control strategy. When at a discount they buy shares in the market and when at a premium they sell shares in the market.


That seems to have become more common. I suppose ITs are competing for investor funds against OEICs and ETFs, both of which trade at market value. Technical measures which attempt to keep the asset value and share price in alignment are presumably then seen as desirable. I don't know that an IT would bother with buybacks if the nature of its holdings was that they were illiquid and challenging to value. We've seen infrastructure companies structured as ITs coming to the market quite frequently for new funding in the form of IPOs or other bulk offers.

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Re: Share buybacks vs Dividends

#447754

Postby Wuffle » October 4th, 2021, 2:45 pm

I like this nibbling back of their own stock at discount.
I would hope this is where some of my fees go.
Not just initial research and stock picking but persistently preying on weaker hands over years and years as the day job.
They go together as I see it.

W.

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Re: Share buybacks vs Dividends

#447870

Postby 1nvest » October 4th, 2021, 8:28 pm

Wuffle wrote:I like this nibbling back of their own stock at discount.
I would hope this is where some of my fees go.
Not just initial research and stock picking but persistently preying on weaker hands over years and years as the day job.
They go together as I see it.

W.

As does gearing. Borrowing at (target) low rates to invest in (ideally) a timely manner. For some they get to cover their costs/expenses, compare to their 'benchmark'. Some do even better, some worse. The FT250 includes around 50 Investment Trusts, so around 20% of its weighting. Broadly it seems that it all washes, if anything FT250 including IT's has tended to lag FT250 excluding IT's.

There are easy ways to DIY similar, and you get to keep any alpha for yourself.

That's for 75/25 stock/gold. Buy and hold is no different to costless lumping in every day. Applying some relative valuation to that such as the ongoing Dow/Gold ratio and you might opt to dynamically adjust weightings over time. But that all tends to wash such that the broader average constant weighted such as 75/25 works to similar/equal effect. A whiteboard full of complex formula sees terms cancelled down to a simple formula. Fundamentally dividends or buy-backs are just elements of total return, scratch a line across the two as cancellations/simplification.


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