LON:MCB | Share Buy Backs - Your Thoughts

9th Mar '21 by turbo

17 comments 946 reads

This is my basic understanding of what a Share buy back is (I googled it):

A share buyback is a transaction between an existing shareholder and a company.

The company can repurchase its shares at any price.
Shareholder approval is required.
There must be sufficient distributable reserves.
Funding for the transaction is from the company.
All remaining shareholders receive an uplift.

Two examples of companies that are engaged in a share buy back are Plus500 - the company announced On 17 February 2021 a programme to buy back up to an additional $25.0 million of the Company's shares, to run up to 11 August 2021 (or date of Company's interim results for the six months ending 30 June 2021}. This was after completion of a previous share buyback programme announced on 11 August 2020. Purchases may continue during any closed period to which the Company is subject during the above-mentioned period. Plus500's Board intends to seek shareholder authorisation at the Company's 2021 AGM to renew the Company's share buyback authorisation for an additional year.

The other company is McBride plc that announced a share buy-back programme of up to £12 million on 2 November 2020. This runs to the date of the Company's next Annual General Meeting, with a repurchase of a maximum 18.3 million shares. Purchases may continue during any closed period to which the Company is subject.

Is there anything that can be inferred from such programmes, could it be an indicator of the health of a company? Looking to hear your thoughts!

Unlock with Email

Unlock with Google

Already have an account?
Login here

turbo

9th Mar '21

Just came across this 2018 article which says

"Share buybacks have been in the news again after politician Vince Cable referred to them as ‘a scandalous trick’ used by listed companies to artificially inflate directors’ pay. A share buyback is where a company buys back its own shares from shareholders."

Kevin Holloway

maybe I am missing something but I thought share buybacks were generally considered a good thing for directors to do when the share price is low and the company has cash

gus 1065

10th Mar '21

Like most things, I suspect it’s more “grey” than black or white as to whether buybacks are good or bad and for that matter exactly for whom they are good or bad. In simple terms a company will buy back its shares if it thinks they’re undervalued and/or if it can’t earn a better return from investing in its own business activities. The first is arguably a good indicator for shareholders (shares are cheap so they will rise in value), the latter perhaps less so (we can’t do anything better with the cash so we might as well give it back to shareholders). This then depends on how much faith you have in the company decision makers (i.e. the Directors). Does anyone not think theirs is always the prettiest baby?

The issue gets more complex when you consider the motives of the Directors. If they are paid based on eps performance buying their own shares will reduce share count and mechanically increase eps without really effecting the underlying business (IDS’s point). Then again, would you not support Directors that think the cake can be made bigger with less equity/fewer shares thereby increasing all shareholders’ future earnings for each share held.

Another layer of complexity then comes in when you consider the merits of paying dividends rather than buying back shares (both are distributions of excess capital), which in turn depends on your own (and to an extent) the companies tax position. All in all, it’s like peeling an onion, lots of layers some good, some bad. The “Why” is often as important as the “What”.

thanks that is interesting to know

Cal H

Some great points there. It's also worth considering what the company is doing with the shares that are bought back, some companies hold them in treasury whereas others cancel them. Obviously the shares held in treasury still exist and can be re-issued later on to raise capital when needed - I would suspect in this case it is primarily because they believe the shares are under-valued. The share buyback by Plus500 (LON:PLUS) has held the shares in treasury for example with 102m shares in issue and 12m in treasury as of today. Alternatively Zytronic (LON:ZYT) recently bought back 30% of their issued share capital and cancelled them, I believe in this case because they had excess cash to return to shareholders. I hold both.

doug2500

I think buybacks are great in theory but mediocre in practice.

In practice IME companies rarely buy back at depressed prices but wait till markets settle and everything is going smoothly and then they start piling in.

Good idea, poor execution (normally)

I'd love to hear of any companies that were buyers in march / april last year?

I noticed £MCB have ben purchasing their own shares over quite a few months, usually around the 80p price range. Still not quite sure what all this buying will achieve. Could it be that Mcbride prefer the SP to stay low while they're doing the buy back, and after that they will engineer news flow to cause re-rating? Maybe I'm just being cynical...

setubal

11th Mar '21

Hi i'm trying to know why while plus500 buy back shares from 22/02/21 the price drop from 1,401.50 to1,273.00, this's after the really decent results the company brought to public, on same day i could have made more than £1.000 in two hours, i did not sell now i'm lose more than that, i'm new on this game i will learn with time and few mistakes

good luck to all and good night

Metatron

Vince Cable negative comment on share buybacks is absolutely right generally.To justify share buybacks one has to believe that it is 95% certain that the share price will be significantly higher in the long run.Sure Warren Buffett has a great record at identifying buy and hold long term shares but even he has made big mistakes. and there are not many Warren Buffetts out there.Most Fund managers long term performance is nothing special as is true of most retail investors.

With most shares there are many variables involved with its long term share performance.If i had to pick one long term buy and hold UK share it would be National Grid but i would prefer it to use its money on investing on its business model rather than buying back its shares

Silver Moon

I hold Plus500 (LON:PLUS) and also £S32 which has also been buying back its own shares in a share buy-back program. I'm pretty certain that the Boards will benefit far more than I from these actions otherwise they would not do it. Maybe in isolated instances a buy-back will off-set dilution caused by the issuing of shares for employee share-purchase schemes and the exercise of boardroom share options which I think is something else. Perhaps there is someone with an opposite view?

transport_tycoon

12th Mar '21

Broadly echoing some others:

In theory, a buy back and a dividend should have the same net effect and an investor valuing a stream of cash of an asset should be indifferent between them.

In practice, I think there are behavioural differences. eg if Facebook pay a dividend, people interpret this as "we've run out of things to do with your money". If they buy back shares, it signals that they're undervalued.

There might also be tax implications to make one better than the other.

Rusty2

But with dividends the money has gone out of the company, the company has nothing to show for it and the share price will probably go down. But with share buyback the company has the shares which have a value and the share price may go up.

In the case of Mcbride, they stated

"The purpose of the share buyback programme is to reduce the share capital of the Company (any Shares repurchased for this purpose will be cancelled)."

So they won't have the shares they are buying.

Maddox

16th Mar '21

Whether buy-backs really make sense for shareholders depends on two critical points, specifically:

aa> The shares repurchased must be trading at a price below their intrinsic value; AND,

bb> There is no better internal use of the cash that would generate a higher return.

Let's look at Sage (LON:SGE) as a case study where a very timely analysis just appeared on Yahoo Finance by Simply Wall Street:

https://finance.yahoo.com/news/calculating-fair-value-sage-group-055337542.html

They've produced a DCF valuation of £SGE. Based on their combining of broker forecasts and their own future projections they calculate the current fair value share price of SGE to be 731p - so a 21.3% premium to yesterday's close of 587.8p.

This suggests that yes, the buy backs are being purchased at below intrinsic value. But there is still the second test: Is there better internal use of the cash?

The rationale for this second test question is that in handing back the cash to shareholders they will then need to find a new investment for the funds. In making a new investment an external investor will almost certainly be buying in at a premium whereas a firm's internally recycled cash is invested at par value. So, it makes better sense to re-invest it rather than return it.

Sage (LON:SGE) has already been making additional investments in its products, its cloud infrastructure and its marketing; also it doesn't appear to need any further bolt-on acquisitions to round-out its product set. Quite the reverse, it has been divesting its geographic implementation capability as it moves towards a local partner model. It has also sold-off its non-core activities such as payment acquiring (SagePay). SGE therefore does appear to have surplus cash that the best use of which is to buy back its own shares that are trading below current intrinsic value.

There is of course a potential kicker here, if that current intrinsic value calculation doesn't reflect the improving prospects from SGE's transformation. The current buy-back programme might also signal that Sage (LON:SGE) 's transformation investment cycle is at an end and management are now looking towards future organic growth returning, which is not reflected in the current share price.

So, these are my thoughts, it'll be interesting to see how this plays-out?

Regards Maddox (long-Sage)

Not surprising with all the uncertainty around Covid, most companies wanted to hold onto their cash.

Sylvania Platinum (LON:SLP) and Quilter (LON:QLT) did do some though.

23rd Dec '21

Thought I'd bump this up seeing there's a lot of discussion on buybacks.

jwebster

26th Dec '21

Taken from the perspective the company has already decided to distribute x million cash to shareholders, then tax-paying, income seeking shareholders should prefer buy-backs over dividends.

With buy-backs (and the necessary cancellation of the shares) given the market cap should remain unchanged, the share price goes up proportionally. So, shareholders can then sell a number of shares equivalent to the dividend amount and then pay capital gains tax on the profit in the UK at 20% which is much lower than the dividend income rate, for higher rate tax payers at least.

This only works if (a) the share prices maintains the PE ratio and moves up accordingly and (b) you sell said shares immediately before the price moves for some other reason.

A cash dividend is more straightforward, and works well in an ISA/SIPP setup, but if liable for tax at the higher rate, painful.

Buybacks get a bad rep though when implemented at market highs, used to soak up mgt stock programmes, or prop up EPS targets. Also the benefit to shareholders can seem lost in the regular volatility of share price movements drowning out any price improvement.

All that aside, long term buy and hold shareholders should prefer buy-backs as it pushes their tax liability out into the future and in the meantime effectively allow the tax component of their investment to compound.

Share Buy Backs - Your Thoughts

Unlock the rest of this article with a 14 day trial

About the Author

Turbo

17 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...