How best to return cash to shareholders?

[scrumpyjack]

I was pleased to see that the press expect the rest of the Aviva capital return to be done by share buybacks (another 3bn).

It is quite a simple principle - return capital as capital and profit as dividends.

As Aviva have disposed of lots of businesses they wish to reduce the number of shares to reflect that, very sensible and far better than blowing it on a directors ego trip or declaring it as a dividend when it is capital not income.

If you want cash back, simply sell some of your shares back to the market.

Incidentally how much free cash do Aviva actually have?

What I find bizarre is that firms like ULVR embellish BBs as "returning cash to shareholders" when they are actually heavily in debt. I would add that I do hold share in Microsoft, who do BBs, but at least they have a positive net cash balance. That's real cash.

But regardless my belief is that BBs are a tax fiddle. Arguably why some governments are trying to "discourage" them.

https://www.nytimes.com/2021/11/19/busi ... stock.html

Matt

As I recall Aviva have raised about £7 billion from selling businesses. They plan to return £4 billion to shareholders and use some of the rest to reduce debt. A US activist investor is pushing them to return more. It is sensible for most firms to have a level of debt to improve profitability by a prudent level of gearing. That is in shareholder's interests.

[GoSeigen]

A quick legal reminder: there are only three legal ways for a (public and operating) company to purchase its own shares:
-Purchases in the market, authorised by the shareholders, funded by distributable profits.
-Capital reduction, authorised by the shareholders and the High Court.
-Redemption (not available for most ordinary shares).

So if a company has distributable profits to hand back to shareholders the choice in most cases is between dividends and purchases (the first of the above).

Then the prime considerations in choosing what to do become:
-tax effects for shareholders (essentially dividend taxation vs capital gains tax)
-whether shareholders will approve purchases (obviously not if the price is too low)
-the business's long-term dividend policy which many shareholders like to be steady and predictable


To suggest, as some are, that purchases of own shares are somehow not a return of cash to shareholders (the owners) is flat-out wrong and flies in the face of Company Law which is perfectly clear on the matter. If anyone wishes to dispute this they need to demonstrate convincingly exactly where they believe the cash is going if not to the shareholders -- and they will be unable to do so. The cash is returned to shareholders as surely as if a dividend is paid: it is only the distribution of that cash among the shareholders which is altered. There is no argument here, this is simply fact and those who doubt it need to go back to the basics and understand them a bit better.


GS

[tjh290633]

To suggest, as some are, that purchases of own shares are somehow not a return of cash to shareholders (the owners) is flat-out wrong and flies in the face of Company Law which is perfectly clear on the matter. If anyone wishes to dispute this they need to demonstrate convincingly exactly where they believe the cash is going if not to the shareholders -- and they will be unable to do so. The cash is returned to shareholders as surely as if a dividend is paid: it is only the distribution of that cash among the shareholders which is altered. There is no argument here, this is simply fact and those who doubt it need to go back to the basics and understand them a bit better.


GS

I would suggest that it is blindingly obvious where the cash goes. It goes to the holders of those shares which are sold. The odds are that those shareholders were going to sell, regardless of who bought them. The cash certainly does not go to the remaining shareholders, who receive no benefit from the exercise.

TJH

[GoSeigen]

To suggest, as some are, that purchases of own shares are somehow not a return of cash to shareholders (the owners) is flat-out wrong and flies in the face of Company Law which is perfectly clear on the matter. If anyone wishes to dispute this they need to demonstrate convincingly exactly where they believe the cash is going if not to the shareholders -- and they will be unable to do so. The cash is returned to shareholders as surely as if a dividend is paid: it is only the distribution of that cash among the shareholders which is altered. There is no argument here, this is simply fact and those who doubt it need to go back to the basics and understand them a bit better.


GS

I would suggest that it is blindingly obvious where the cash goes. It goes to the holders of those shares which are sold. The odds are that those shareholders were going to sell, regardless of who bought them. The cash certainly does not go to the remaining shareholders, who receive no benefit from the exercise.

TJH

Thank you TJH. I am glad we are in agreement here: not all the shareholders receive the cash, just the ones who want it, and the cash is no longer held by the company.

Hopefully this will help the doubters.

GS

[dealtn]

The cash certainly does not go to the remaining shareholders, who receive no benefit from the exercise.

TJH

They certainly do benefit. They result in a position of owning more of the company and its future cashflows (and if you like Dividend distributions). If you don't think this is of any value I am very happy to buy any shares, or future dividends from you at a price of £0. I suspect you won't be tempted to enter into such a contract.

[tjh290633]

The cash certainly does not go to the remaining shareholders, who receive no benefit from the exercise.

TJH

They certainly do benefit. They result in a position of owning more of the company and its future cashflows (and if you like Dividend distributions). If you don't think this is of any value I am very happy to buy any shares, or future dividends from you at a price of £0. I suspect you won't be tempted to enter into such a contract.

They may own more of the company, if the shares bought in are cancelled. Otherwise they own the same number of shares and the share price goes where it will. The expression I would like to use is not for polite company, but sufficient to say that Gentlemen's urinal walls come into it.

There may or may not be fewer shares around which to spread the dividends. There is no certainty that the amount in dividends which the shareholder will receive is higher than had there been no buy-back.

There are, of course, benefits to executives with various share option perks. That has been gone into many times in the past as being a driver for share buy-backs.

I make my own decisions about buying and selling shares, and I certainly would not be either buying any from you or selling them to you, regardless of the price you were to offer.

TJH

[GoSeigen]

The cash certainly does not go to the remaining shareholders, who receive no benefit from the exercise.

TJH

They certainly do benefit. They result in a position of owning more of the company and its future cashflows (and if you like Dividend distributions). If you don't think this is of any value I am very happy to buy any shares, or future dividends from you at a price of £0. I suspect you won't be tempted to enter into such a contract.

They may own more of the company, if the shares bought in are cancelled. Otherwise they own the same number of shares and the share price goes where it will. The expression I would like to use is not for polite company, but sufficient to say that Gentlemen's urinal walls come into it.

There may or may not be fewer shares around which to spread the dividends. There is no certainty that the amount in dividends which the shareholder will receive is higher than had there been no buy-back.

The above betrays a likely lack of knowledge of the law in this area. Even if shares are held in treasury dividends will only be paid to shares not in treasury. That is because it is illegal to do otherwise! [CA 2006 S726(3)]

It is certain that the amount will be higher than if a dividend had been paid instead of the share buyback, AEBE. Continuing dividends would be distributed among a smaller number of shares, this is simple maths, nothing mysterious about it at all.

GS

[tjh290633]

The above betrays a likely lack of knowledge of the law in this area. Even if shares are held in treasury dividends will only be paid to shares not in treasury. That is because it is illegal to do otherwise! [CA 2006 S726(3)]

It is certain that the amount will be higher than if a dividend had been paid instead of the share buyback, AEBE. Continuing dividends would be distributed among a smaller number of shares, this is simple maths, nothing mysterious about it at all.

GS

Go and teach your grandmother to suck eggs. I am well aware of that fact. There is no certainty that future dividends after a buyback will be higher, they might be reduced. The only effect is that if the shares are cancelled, then the shareholder owns a slightly higher percentage of the company.

TJH

[dealtn]

The above betrays a likely lack of knowledge of the law in this area. Even if shares are held in treasury dividends will only be paid to shares not in treasury. That is because it is illegal to do otherwise! [CA 2006 S726(3)]

It is certain that the amount will be higher than if a dividend had been paid instead of the share buyback, AEBE. Continuing dividends would be distributed among a smaller number of shares, this is simple maths, nothing mysterious about it at all.

GS

Go and teach your grandmother to suck eggs. I am well aware of that fact. There is no certainty that future dividends after a buyback will be higher, they might be reduced. The only effect is that if the shares are cancelled, then the shareholder owns a slightly higher percentage of the company.

TJH

There is no certainty either that the next dividend will exceed that spent on the previous one (as an alternative to that buyback) either!

But if you want a comparison between the 2 approaches, and consider identical situations where the exact same amount is spent by the company first, either on a buyback or dividend payout, and then again the exact same amount is spent on a dividend only for the subsequent investor return, then any individual not partaking in the buyout will receive a higher dividend payout than if a buyback hadn't taken place.

Relying on non-identical hypothetical scenarios to argue against the buyback won't convince.

[monabri]

"How best to return cash to shareholders "..?

A brown envelope or by BACS. How else do you "return" cash?.

[csearle]

"How best to return cash to shareholders "..?

A brown envelope or by BACS. How else do you "return" cash?.

Absolutely. There is a lot of trash talked about this. If you receive a dividend you really have received the cash. Concrete cash. No ambiguity. If on the other hand you witness that "returned" (ha ha) cash going into a share buyback, you receive zero cash. The share might go up; might go down. There is zero discernible correlation. It can I suspect only be some trick to further the interests of those that arrange for it to be done.

No amount of theoretical tosh about it being equivalent is likely to convince me that some vague promise of future earnings is equivalent to just distributing the surplus immediately.

Chris

[GoSeigen]

"How best to return cash to shareholders "..?

A brown envelope or by BACS. How else do you "return" cash?.

Absolutely. There is a lot of trash talked about this.

Projecting.

If you receive a dividend you really have received the cash. Concrete cash. No ambiguity. If on the other hand you witness that "returned" (ha ha) cash going into a share buyback, you receive zero cash.

Deceitful. "You" has a different meaning here. In the statement about dividends "you" means "each shareholder"; in this statement about buybacks the meaning of "you" has quietly been changed to "those shareholders who didn't participate in the buyback". So of course those who didn't participate didn't receive cash. What you fail to say, deceptively IMO, is that those who did choose to participate received far more cash from the company than they would have if a dividend had been paid. In other words they received a super dividend.

It only remains to say that if a shareholder wants cash from a company but turns down the opportunity of this super-dividend by joining the majority who receive nothing then it is their own dumb retail-investor fault!

The share might go up; might go down. There is zero discernible correlation. It can I suspect only be some trick to further the interests of those that arrange for it to be done.

Again deceptive. There is no trickery. This process is carefully regulated by the Companies Acts which actually prohibit purchases of shares except in carefully delineated circumstances. I dare you to challenge any "cheating" FTSE100 share buyback programme either in court or at a debate of the authorising AGM motion.

Shares at any time might go up or they might go down. What's the point?? However, if in 2021 dividends were paid to holders of 1m shares while in 2022 and thereafter the same dividend will be paid to holders of 0.96m shares would you be stupid enough to value the shares at the same price as last year, AEBE?

No amount of theoretical tosh about it being equivalent is likely to convince me that some vague promise of future earnings is equivalent to just distributing the surplus immediately.

Correct: It is not equivalent to a distribution; it IS a distribution.

GS
EDIT: before anyone complains about the word deceit it is a rhetorical lampooning of the previous authors use of language like "a lot of trash", "some trick" and the thinly disguised accusation of fraud or corruption on the part of our company directors.

[dealtn]

"How best to return cash to shareholders "..?

A brown envelope or by BACS. How else do you "return" cash?.

Absolutely. There is a lot of trash talked about this.

On this we can clearly agree!

If you receive a dividend you really have received the cash. Concrete cash. No ambiguity. If on the other hand you witness that "returned" (ha ha) cash going into a share buyback, you receive zero cash.

Again we agree. Anyone not choosing to receive cash, in line with that choice, gets no cash. (Interestingly an asynmmetry with dividends where those preferring not to receice cash have to make arrangements to avoid it).

The share might go up; might go down. There is zero discernible correlation.

That might be an issue with those unable to discern it. That doesn't include those familiar with Corporate Finance theory, nor those that have done actual empirical work finding evidence that disproves your view.

It can I suspect only be some trick to further the interests of those that arrange for it to be done.

It is almost literally the opposite. What trick purpetrated by who, for whose benefit? How would it be legal and not prosecutable? Any evidence of a single buyback of a listed share that resulted in a breach of Company law leading to prosecution?

No amount of theoretical tosh about it being equivalent is likely to convince me that some vague promise of future earnings is equivalent to just distributing the surplus immediately.

Chris

I think that says more about you than it does about buybacks.

[GeoffF100]

No ambiguity. If on the other hand you witness that "returned" (ha ha) cash going into a share buyback, you receive zero cash. The share might go up; might go down. There is zero discernible correlation.

If a dividend was paid, the price it would fall by the price of the dividend on the xd date. After a buyback, barring volatility, the share price should remain unchanged. In practice, there will be volatility. The share might go up; might go down. That happens always, but not as the result of a buyback.

It is the same situation with an accumulating fund. The dividends are reinvested, but the number of units remains the same. The price of the income units falls by the value of the dividend on the xd date. The price of the accumulation units remains the same, again barring volatility.

Nobody claims that accumulation units do not reinvest dividends because the price of a unit does not go up when a dividend is paid. Why do they make that mistake with buybacks?

[dealtn]

No ambiguity. If on the other hand you witness that "returned" (ha ha) cash going into a share buyback, you receive zero cash. The share might go up; might go down. There is zero discernible correlation.

If a dividend was paid, the price it would fall by the price of the dividend on the xd date. After a buyback, barring volatility, the share price should remain unchanged. In practice, there will be volatility. The share might go up; might go down. That happens always, but not as the result of a buyback.

It is the same situation with an accumulating fund. The dividends are reinvested, but the number of units remains the same. The price of the income units falls by the value of the dividend on the xd date. The price of the accumulation units remains the same, again barring volatility.

Nobody claims that accumulation units do not reinvest dividends because the price of a unit does not go up when a dividend is paid. Why do they make that mistake with buybacks?

Imagine a world where no shares are listed but "prices" are determined solely by the value of the companies assets divided by the number of shares.

A company might have at its year end £1,000,000 in productive assets and £100,000 of accumulated earnings that are simply cash at its bank. There are 1mio shares in this unlisted business. The company directors decide to pay the holders of this business the entirety of those earnings as a cash dividend. On the day before this decision is made the company has assets of £1.1mio and 1mio shares with each worth 110p. The decision is made to pay the dividend and each owner gets 10p in cash. As there has been no change in the value of any assets those owners still have 110p but with 10p now theirs in cash, the value of the shares falls to 100p representing the value of the remaining productive assets.

An exactly identical business has an alternative set of Directors and they decide to distribute the free cash in the business but choose an alternative route of asking if any of the owners would like to sell their shares at the asset value price of 110p, and find exactly 90,909 shares for sale and £100,000 exits the business leaving £1mio of productive assets now owned by 909,091 shares.

The businesses remain exactly identical and are worth the same, the only difference being the number of shares, the former with 1mio the latter with just 909,091. The shares are worth different amounts. A holder in the former has shares worth 100p and 10p in cash received as a dividend totaling 110p. A holder in the latter that took part in the buyback has no shares and 110p in cash from the buyback, worth 110p. A holder in the latter that didn't participate in the buyback has a share worth 110p.

So please explain why a rational market listed share would be different.

Please explain the model you are using such that

After a buyback, barring volatility, the share price should remain unchanged.

[GeoffF100]

Please explain the model you are using such that

After a buyback, barring volatility, the share price should remain unchanged.

Precisely the same as yours. Lets choose simpler numbers. 10 people pay £900 each to form a company. They are all allocated one share in the company. The company is initially worth £9,000. Each person's share is worth £9,000 / 10 = £900.

The company makes steady profits, and after a year has accumulated £1,000. The company is now worth £10,000. Each person's share is now worth £10,000 / 10 = £1,000.

The chairman recommends paying out the year's profit as a dividend of £100 to each shareholder. That would make the company worth only £9,000, because it would have had paid out 10 * £100 = £1,000 in dividends.

Fred, however, thinks the company is boring and wants to be bought out, so that he can bet his money on crypto or a horse. The shareholders vote to buy Fred out with the £1,000 accumulated profit. Fred takes the money and disappears down to the bookie's.

The company is now worth £9,000, because it has paid out £1,000 to Fred, but there are now only 9 shareholders. Each of these share holders has a share worth £9,000 / 9 = £1,000. That is the same as what it was before Fred was bought out.

[GoSeigen]

No ambiguity. If on the other hand you witness that "returned" (ha ha) cash going into a share buyback, you receive zero cash. The share might go up; might go down. There is zero discernible correlation.

If a dividend was paid, the price it would fall by the price of the dividend on the xd date. After a buyback, barring volatility, the share price should remain unchanged. In practice, there will be volatility. The share might go up; might go down. That happens always, but not as the result of a buyback.

It is the same situation with an accumulating fund. The dividends are reinvested, but the number of units remains the same. The price of the income units falls by the value of the dividend on the xd date. The price of the accumulation units remains the same, again barring volatility.

Nobody claims that accumulation units do not reinvest dividends because the price of a unit does not go up when a dividend is paid. Why do they make that mistake with buybacks?

To get one's head around dividends vs buybacks it is essential to keep the value of the business and the price of the shares as separate entities. People default to share price = value of the business because most of the time the number of shares is constant but they are NOT equivalent if the number of shares is changing!. With buybacks you have to abandon this shortcut.


So let's contrast what happens to an idealised company with dividends vs buybacks. The value of our company is the market price multiplied by shares outstanding; it is also the discounted value of the expected cashflows, and of course near-term cashflows are not discounted to any relevant extent for the purposes of this discussion especially in our low-yield environment. Also, we assume for simplicity our business performance is perfectly smooth, dividend payment (or buyback) policy is set perfectly by an infallible board and the economy does not affect the business valuation [in other words we strip out the very volatile noise which normally swamps and hides the price effect of dividends and buybacks].

Let us consider the situation between consecutive near-term dividend payments. In our simplified model the underlying value of the business is constant from one dividend period to the next. On the ex date a dividend has been declared but shareholders are no longer entitled to receive it. Thus the business will pay out one less near-term cashflow to holders compared to the previous day and the business value falls by the amount of the dividend. (Since the previous ex date of course the company has traded and accumulated distributable profits as usual to meet the dividend payment.) What happens in between the two ex dates? All the future cashflows are getting nearer day by day so their discounted value rises a little each day; thus the business value rises steadily over the dividend period. [If the dividends were paid in small amounts daily rather than in infrequent lump sums the business value would remain constant from day to day.]

Now, since the number of shares is constant in this scenario, the share price also will be seen to rise steadily over the dividend period until ex date when it drops by the amount of the dividend back to its value at the previous ex date. Anyone familiar with bonds will recognise this as exactly what happens to the price of a perpetual bond. The value of the business and the share price don't vary from one ex-date to the next.


What happens with buybacks? Let's say that a single dividend is replaced by a buyback of the same value. In terms of the business finance nothing changes: trading is as in previous periods, creating distributable profits; cash is paid out in the same amount as previous dividends. It stands to reason then that the value of the business will be the same as the dividend case immediately prior to the buybacks. However by the end of the buyback program the situation will be different: remaining shareholders will not have received a cashflow that they would have received had a dividend been paid. However, they will be entitled to a higher proportion of all the future dividends because there are now fewer shares, i.e. all future cashflows will increase in proportion to the number of shares bought back. Since we know the value of the business is unchanged we deduce that the missed cashflow is the same value to remaining shareholders as their increased future cashflows. Since the number of shares remaining is smaller, the price of each share has risen in similar proportion. Future dividend per share is higher, but the price is also higher so dividend yield is unchanged.

The price per share has risen permanently, but in what manner? Well, the market doesn't know the exact timing of purchases but can form a view and adjust the share value progressively upwards accordingly. If that view turns out to have been inaccurate when buyback results are published then the share price might adjust for the mismatch at the time of the announcement.

With a buyback, the value of the business is unchanged at the end of each buyback period, but the number of shares has decreased and the share price increased in proportion to the buyback, and future dividend per share is higher.

GS

[GoSeigen]

Please explain the model you are using such that

After a buyback, barring volatility, the share price should remain unchanged.

Precisely the same as yours. Lets choose simpler numbers. 10 people pay £900 each to form a company. They are all allocated one share in the company. The company is initially worth £9,000. Each person's share is worth £9,000 / 10 = £900.

The company makes steady profits, and after a year has accumulated £1,000. The company is now worth £10,000. Each person's share is now worth £10,000 / 10 = £1,000.

The chairman recommends paying out the year's profit as a dividend of £100 to each shareholder. That would make the company worth only £9,000, because it would have had paid out 10 * £100 = £1,000 in dividends.

Fred, however, thinks the company is boring and wants to be bought out, so that he can bet his money on crypto or a horse. The shareholders vote to buy Fred out with the £1,000 accumulated profit. Fred takes the money and disappears down to the bookie's.

The company is now worth £9,000, because it has paid out £1,000 to Fred, but there are now only 9 shareholders. Each of these share holders has a share worth £9,000 / 9 = £1,000. That is the same as what it was before Fred was bought out.

The value of the shares after the dividend is £900. The value of the shares after the buyback is £1000. Using GeoffF100's own numbers. The share price is higher after a buyback than after an equivalent dividend AEBE which I think is what dealtn was saying.


Also I note GeoffF100 is comparing values on ex div date versus the day before [his prerogative], and buyback date versus immediately prior to buyback; however arguably the more easily comparable and comprehensible dates are from one dividend (or buyback equivalent) period/date to the next. As per my earlier post.

EDIT: Which is to say it's possible everyone is in agreement here, just inadvertently referring to different dates or periods.

GS

[Padders72]

On the basis of Jam today vs Jam tomorrow I’d rather have a nice fat special div rather than buybacks with a theoretical benefit personally but I recognise that everyone’s tax situation and therefore preference differs.

[dealtn]

Please explain the model you are using such that

After a buyback, barring volatility, the share price should remain unchanged.

Precisely the same as yours. Lets choose simpler numbers. 10 people pay £900 each to form a company. They are all allocated one share in the company. The company is initially worth £9,000. Each person's share is worth £9,000 / 10 = £900.

The company makes steady profits, and after a year has accumulated £1,000. The company is now worth £10,000. Each person's share is now worth £10,000 / 10 = £1,000.

The chairman recommends paying out the year's profit as a dividend of £100 to each shareholder. That would make the company worth only £9,000, because it would have had paid out 10 * £100 = £1,000 in dividends.

Fred, however, thinks the company is boring and wants to be bought out, so that he can bet his money on crypto or a horse. The shareholders vote to buy Fred out with the £1,000 accumulated profit. Fred takes the money and disappears down to the bookie's.

The company is now worth £9,000, because it has paid out £1,000 to Fred, but there are now only 9 shareholders. Each of these share holders has a share worth £9,000 / 9 = £1,000. That is the same as what it was before Fred was bought out.

Ok I see your argument.

But the discussion had been about the difference between buybacks and dividends, I thought, incorrectly, you were making a claim the price would be the same. As you demonstrate it isn't. £1,000 is more than £900.

Some here appear to believe the act of the buyback doesn't increase the price of the shares above that of a dividend payout method. Thus dividends are better as you get both the same end resulting share price and the benefit of cash received.