Aviva (AV.)

[GoSeigen]

What happens if they 'return capital to shareholders' in the form of a buyback and then the share price drops? Oops.

Why "oops"? The shareholder authorised the buyback at prevailing market prices. She sold her shares back to the company. The price dropped. All looks fine to me.

Oh, you mean what about the remaining holders? Well, of course they considered the buyback price too low to induce them to sell, so they held on. Then the price dropped even further. If they are still bullish about the company they have the perfect opportunity to purchase shares in the market at a discount to the value they perceive the shares to represent. Bingo!

So as I said, why oops?


GS

[Dod101]

It's not theory, it's fact, which really should not be misrepresented... It's a return of capital in company law, in accounting, and in practice -- just as an issue of shares is a raising of capital (a transfer to capital to the company).

GS

How much of this capital return (assuming it is in the form of a share buyback) do you expect to see then?
How much of it will turn up in your portfolio or bank account?

There's a fallacy of composition here, or hasty generalisation if you like. Just because one shareholder receives no payment does not mean that there has been no capital return. Similarly the fact that a shareholder receives a payment does not mean that all shareholders will receive it.

The capital return is made to the shareholders as a class. One individual might participate while another doesn't. Where someone accepts a larger return of capital than the proportion being purchased by the company then necessarily some other holder is accepting less. Whether an individual shareholder wishes to participate is entirely up to her; similarly the extent of her participation. If a shareholder wishes to benefit from the capital return but does not then that is the shareholder's own fault. But it doesn't change the fact that a capital return has occurred.


As for me, my exposure to Aviva is probably too small individually to make it worthwhile participating immediately. But perhaps after some time I will trim. Depends whether I consider the price the buybacks are being made at is high enough.

GS

Yes from the point of view of the company it is returning capital to shareholders as a class because when they authorise their broker to buyback shares in the market, usually within certain parameters as regards price, that is what they are doing. However unless it is a tender offer the chances of any one individual shareholder getting the price authorised is at best a 'maybe' because you are simply instructing a sale and do not know who the buyer is nor I imagine do you care as long as you get what seems an acceptable price.

I do not know why shareholders get so uptight about this subject. As we have said, it is likely that Aviva will use a share buyback because apart from anything else they will want to reduce the number of shares in issue and that is the easy way to do that. It helps continuing shareholders because it leaves less mouths to feed and may help dividend paid per share. You only have to look at Phoenix Holdings to see the opposite effect, issuing large numbers of shares to fund acquisitions notwithstanding that the acquired companies have apparently been earnings accretive from the start. They have held their dividend for a long while and in fact reduced it at one point.

Dod

[GoSeigen]

Yes from the point of view of the company it is returning capital to shareholders as a class because when they authorise their broker to buyback shares in the market, usually within certain parameters as regards price, that is what they are doing. However unless it is a tender offer the chances of any one individual shareholder getting the price authorised is at best a 'maybe' because you are simply instructing a sale and do not know who the buyer is nor I imagine do you care as long as you get what seems an acceptable price.

Agreed; we are talking about maybe 2% (spread, costs) of 5% (buyback quantum), so and individual shareholder "loses" maybe 0.1% of her return by selling in the market and not participating directly in a tender offer. Given buybacks are only one of a number of ways of having your capital returned the loss is even smaller over all time and all capital. So it's not really a point I worry about.

I do not know why shareholders get so uptight about this subject. As we have said, it is likely that Aviva will use a share buyback because apart from anything else they will want to reduce the number of shares in issue

I don't think that is the purpose -- unless you mean that they thereby reduce the capital held by the company. The number of shares is not an important metric is it? But yeah, I see very little economic difference between share buybacks and the other two legal methods of returning capital, dividends and capital reduction. [Unless the market has the share price radically wrong, but then individual shareholders can figure that out and take their own action -- this share-price argument always works against those trying to advance it.]

and that is the easy way to do that. It helps continuing shareholders because it leaves less mouths to feed and may help dividend paid per share.

I wouldn't say it helps continuing shareholders. I'd say it's neutral to them. The company has less capital and its value is also less, but the company has fewer shares in issue and each holder retains a larger proportion of the smaller company so their future cashflows will be proportionately larger.

You only have to look at Phoenix Holdings to see the opposite effect, issuing large numbers of shares to fund acquisitions notwithstanding that the acquired companies have apparently been earnings accretive from the start. They have held their dividend for a long while and in fact reduced it at one point.

Not familiar with Phoenix so will take your word for it.

GS

[absolutezero]

What happens if they 'return capital to shareholders' in the form of a buyback and then the share price drops? Oops.

Why "oops"? The shareholder authorised the buyback at prevailing market prices. She sold her shares back to the company. The price dropped. All looks fine to me.

Oh, you mean what about the remaining holders? Well, of course they considered the buyback price too low to induce them to sell, so they held on. Then the price dropped even further. If they are still bullish about the company they have the perfect opportunity to purchase shares in the market at a discount to the value they perceive the shares to represent. Bingo!

So as I said, why oops?


GS

Not necessarily specifically related to Aviva, but more a general comment.
One reason is they would be much better paying off massive amounts of debt (maybe even entering a net cash situation) to make the company more financially secure rather than engaging in flushing cash down the toilet on share buybacks.
When companies have trouble, it is invariably debt related.

[Dod101]

What happens if they 'return capital to shareholders' in the form of a buyback and then the share price drops? Oops.

Why "oops"? The shareholder authorised the buyback at prevailing market prices. She sold her shares back to the company. The price dropped. All looks fine to me.

Oh, you mean what about the remaining holders? Well, of course they considered the buyback price too low to induce them to sell, so they held on. Then the price dropped even further. If they are still bullish about the company they have the perfect opportunity to purchase shares in the market at a discount to the value they perceive the shares to represent. Bingo!

So as I said, why oops?


GS

Not necessarily specifically related to Aviva, but more a general comment.
One reason is they would be much better paying off massive amounts of debt (maybe even entering a net cash situation) to make the company more financially secure rather than engaging in flushing cash down the toilet on share buybacks.
When companies have trouble, it is invariably debt related.

It is generally financially efficient to carry a certain amount of debt especially if you are an insurance company or a bank so I find your comments very strange. What is more, if they 'indulge' as you might say in share buybacks that is not, whatever you might think, 'flushing cash down the toilet' . If you think it is why do you think that Discount Control Mechanisms work to control the discount with investment trusts?

These myths are not helpful for new investors who may read some of these comments and believe them.

Dod

[GoSeigen]

What happens if they 'return capital to shareholders' in the form of a buyback and then the share price drops? Oops.

Why "oops"? The shareholder authorised the buyback at prevailing market prices. She sold her shares back to the company. The price dropped. All looks fine to me.

Oh, you mean what about the remaining holders? Well, of course they considered the buyback price too low to induce them to sell, so they held on. Then the price dropped even further. If they are still bullish about the company they have the perfect opportunity to purchase shares in the market at a discount to the value they perceive the shares to represent. Bingo!

So as I said, why oops?


GS

Not necessarily specifically related to Aviva, but more a general comment.
One reason is they would be much better paying off massive amounts of debt (maybe even entering a net cash situation) to make the company more financially secure rather than engaging in flushing cash down the toilet on share buybacks.
When companies have trouble, it is invariably debt related.

True but this is a problem for creditors, not shareholders (since the capital is not being flushed down the toilet but directly into the shareholders' pockets). Creditors however are protected by company law: buybacks may only be made out of distributable profits; dividends likewise; redemption is written into the company Articles at issue; and capital reduction requires approval of the high court.

Besides, how does a company repay "massive amounts of debt" if they only have a small amount of free capital to return to shareholders? Or do you mean pay off a little bit of the debt instead of distributing that capital? [And just in case you query the figures, Lloyds Bank for example has around £1tr of liabilities. Their buybacks this year would amount to (guessing) around 5% of their £35bn market cap; so 5% of £35bn equals 1.75bn -- which will barely make a dent in the £1tr debt, most of which is probably funded at close to 0% anyway. So repaying debt would be a very dubious activity from the shareholders' PoV.]

GS

[absolutezero]

True but this is a problem for creditors, not shareholders (since the capital is not being flushed down the toilet but directly into the shareholders' pockets)

Please do let me know precisely how much has been flushed directly into your pocket after the event.

[Steveam]

From today’s FT

“Europe’s largest activist investor Cevian has built a 5 per cent stake in Aviva and is pressing the FTSE 100 insurer to make deeper cost cuts and return £5bn to shareholders.

“Aviva has been poorly managed for many years, and its high-quality core businesses have been held back by high costs and a series of bad strategic decisions,” said Christer Gardell, Cevian’s co-founder.

Shares in Aviva rose 3.3 per cent to £4.24 after Cevian released a statement on Tuesday morning.”

Best wishes,

Steve

[GoSeigen]

True but this is a problem for creditors, not shareholders (since the capital is not being flushed down the toilet but directly into the shareholders' pockets)

Please do let me know precisely how much has been flushed directly into your pocket after the event.

I am not the shareholders. I am a shareholder.

https://en.wikipedia.org/wiki/Fallacy_of_composition

GS

[absolutezero]

True but this is a problem for creditors, not shareholders (since the capital is not being flushed down the toilet but directly into the shareholders' pockets)

Please do let me know precisely how much has been flushed directly into your pocket after the event.

I am not the shareholders. I am a shareholder.

https://en.wikipedia.org/wiki/Fallacy_of_composition

GS

Very community minded of you to worry about the other shareholders.
I only really care about my own finances. My point still stands.

[GoSeigen]

Please do let me know precisely how much has been flushed directly into your pocket after the event.

I am not the shareholders. I am a shareholder.

https://en.wikipedia.org/wiki/Fallacy_of_composition

GS

Very community minded of you to worry about the other shareholders.
I only really care about my own finances. My point still stands.

There:

viewtopic.php?t=11253&view=unread#p418523

Just received 100% of my share value in the Lloyds pref share buyback. That fact adds literally zero to my or absolutezero's argument. absolutezero's continued protestations make no sense whatsoever because of the fallacy of composition: The fact that I received 100% does NOT mean that every other shareholder will also participate 100%. Some may choose to hold on to their shares; that in turn does NOT mean that capital has not been returned the the shareholders.

As for "community mindedness" that is ad hominem and distraction. Simply lay out your own stall if you have anything of value to add...

GS

[Padders72]

You mean The Natwest buyback presumably.

[GoSeigen]

You mean The Natwest buyback presumably.

Yes, d'oh! Struggling with all the changes of name


GS

[Steveam]

https://www.aviva.com/content/dam/aviva ... t-pack.pdf

Interim results - looking good.

We are delivering on our commitment to make a substantial capital return to our shareholders. We intend to return at least £4 billion to investors by the end of the first half of 20221, starting with a share buyback of up to £750 million.
We delivered strong cash remittances4,‡ of £1.1 billion in the first half and we are on track to achieve our objective of over £5 billion in cash remittances‡ between 2021 and 2023. In light of our confidence in the strength of the business and underlying cash flows, the Board has declared a 5% increase in the interim dividend to 7.35 pence per share.

[Dod101]

https://www.aviva.com/content/dam/aviva-corporate/documents/investors/pdfs/results/2021/aviva-hy2021-analyst-pack.pdf

Interim results - looking good.

We are delivering on our commitment to make a substantial capital return to our shareholders. We intend to return at least £4 billion to investors by the end of the first half of 20221, starting with a share buyback of up to £750 million.
We delivered strong cash remittances4,‡ of £1.1 billion in the first half and we are on track to achieve our objective of over £5 billion in cash remittances‡ between 2021 and 2023. In light of our confidence in the strength of the business and underlying cash flows, the Board has declared a 5% increase in the interim dividend to 7.35 pence per share.

Capital returns are the easy bit, but how about the underlying business? It looks quite good as well but then shareholders in Aviva deserve a break. There have been many false dawns in this business.

Dod

[Padders72]

Reading the release, if there is £4bn to return, a £750m buyback starting immediately and a 5% increase in interim, doesn't that make a pretty substantial Special Div at some point in the next 9 months inevitable, or will they just keep a rolling buyback program going do we think? Am I missing an alternative? If this is right, and there is a big special on the way, I wonder if the market have already priced this in.

[Dod101]

I should think that the bulk of the return to shareholders will be by share buybacks. After all they have substantially reduced the size of the business. It is usual for big share buybacks to be undertaken in tranches presumably so as not to drive the price of the existing shares up.

A big special dividend which would be essentially a return of capital should not in any case have any value to be 'priced in' since there is no long term benefit and it would merely be a return of shareholder's own money.

Dod

[scrumpyjack]

Reading the release, if there is £4bn to return, a £750m buyback starting immediately and a 5% increase in interim, doesn't that make a pretty substantial Special Div at some point in the next 9 months inevitable, or will they just keep a rolling buyback program going do we think? Am I missing an alternative? If this is right, and there is a big special on the way, I wonder if the market have already priced this in.

They say in the results

"We intend to provide further details, including the mechanism of the remaining capital return (with preference for methods that would result in a reduction in share count) at Aviva’s full year results in March 2022. "

There are a number of options. The problem with very large share buybacks is that the SP may get temporarily pushed up and it can result in large institutional holders taking advantage of that. I do hope they don't pay it as a special dividend because the cash is capital from selling companies, not income from trading profits. So forcing some shareholders to pay high rates of income tax on it is not sensible.

The other options are to have a tender so all shareholders get the chance to offer to sell shares back to the company or to spread the buybacks over a longer period so as to avoid distortion of the share price.

[Padders72]

I should think that the bulk of the return to shareholders will be by share buybacks. After all they have substantially reduced the size of the business. It is usual for big share buybacks to be undertaken in tranches presumably so as not to drive the price of the existing shares up.

A big special dividend which would be essentially a return of capital should not in any case have any value to be 'priced in' since there is no long term benefit and it would merely be a return of shareholder's own money.

Dod

I would have thought the whole point of buybacks was to drive the price up (or at least maintain it long term) but I do see what you mean. Your point about a special being essentially neutral is correct in theory but in practice prices do react to big one off dividends, though not always positively (see Tesco for instance). Of course dividends aren't necessarily everyone's favourite choice due to personal tax circumstances as noted above. As Jack says tender would certainly be best for the non-Insti holders but how often does a big FTSE100 company worry about those?

[monabri]

(The conversation might have gone.... )

"We've got 4bn pounds ...what can we do with it?"

" err..dunno, we've been flogging stuff off ....it'd look daft to buy something to expand the empire! "

" What's the shareprice.....about 4 quid"

" so...4bn quid at 4 quid a pop....about 1 billion shares....get the CFO to confirm that ! "

" but we can't do it all at once, that'd be 25% of the current pool ..so let's do it over 5 tranches"

" what would that do, if we were to have 5 tranches and bought back that quantity?"

" well, the sharecount would be back at what it was in 2012"

" we'd save ~£200 per annum in dividends and a likely increase in shareprice, the shareprice would probably react favourably to a lot less shares and we could justify a pay increase."

" did you say, pay increase..?"

" oh well, in the absence of any other plan...."