Buy back shares

[Pat494]

got a tip recently about the importance of watching share buy back. This makes good sense if the directors are willing to buy back their own company shares. They should know after-all.
I have looked for a source of information and so far failed. Probably some knowledgeable person on this website will know. If so please post web address.
I have tried Google but 20 million pages is a bit much. Also this website search engine.

 

[Jack o'Clubs]

Hi Pat,

I'm not aware of anywhere that tracks companies that are undergoing share buy-backs, but I'd sound a note of caution about it being a good indicator for the company. Often the market will mark up a company's shares for a buyback programme, but this is usually in the latter stages of a long bull market where the market is nervous about the company splurging cash on acquisitions, and would rather see it handed safely back to shareholders via a buyback or special dividend. Also the mark-up will occur instantaneously when the company announces the buyback, or even before, in anticipation, so it's difficult for a private investor to be ahead of the market in taking advantage (the share price uplift from a buyback is a simple calculation, and the market should discount it immediately). But the negative view is that the company should be investing in growth (either organically or through careful acquisition) and if all it can think of doing is giving excess cashflow back to shareholders rather than re-investing, it can demonstrate a lack of growth options (or imagination) for the company. Ultimately, no value is created through a buy-back, and it can be done for cynical reasons (eg enhancing eps, if that's a performance metric for director bonuses).

Personally a better indicator I think is director buys/sells. After all, if the CEO is prepared to invest a hefty chunk of his own personal cash then that really should be a good sign. The FT, or a website like Digital Look, lists major director buying and selling activity. Personally I put less emphasis on selling unless there is more than one director doing it, as it may just be that the boss needs to put a downpayment on his new yacht, or pay off his old wife for the new trophy blonde on his arm, rather than a specific problem with the company.

Hope that helps.

 

[Splitlink]

Hi Pat,

I'm not aware of anywhere that tracks companies that are undergoing share buy-backs, but I'd sound a note of caution about it being a good indicator for the company. Often the market will mark up a company's shares for a buyback programme, but this is usually in the latter stages of a long bull market where the market is nervous about the company splurging cash on acquisitions, and would rather see it handed safely back to shareholders via a buyback or special dividend. Also the mark-up will occur instantaneously when the company announces the buyback, or even before, in anticipation, so it's difficult for a private investor to be ahead of the market in taking advantage (the share price uplift from a buyback is a simple calculation, and the market should discount it immediately). But the negative view is that the company should be investing in growth (either organically or through careful acquisition) and if all it can think of doing is giving excess cashflow back to shareholders rather than re-investing, it can demonstrate a lack of growth options (or imagination) for the company. Ultimately, no value is created through a buy-back, and it can be done for cynical reasons (eg enhancing eps, if that's a performance metric for director bonuses).

Personally a better indicator I think is director buys/sells. After all, if the CEO is prepared to invest a hefty chunk of his own personal cash then that really should be a good sign. The FT, or a website like Digital Look, lists major director buying and selling activity. Personally I put less emphasis on selling unless there is more than one director doing it, as it may just be that the boss needs to put a downpayment on his new yacht, or pay off his old wife for the new trophy blonde on his arm, rather than a specific problem with the company.

Hope that helps.

There is diverse opinion about this tactic on the company's part. Peter Lynch, the famous Magellan Fund manager argued that it showed good management. Next PLC, for example, more than a decade or so ago, had over 120 million pounds in cash and admitted that it could not expand organically (that was part of its trading policy) and had to increase profits by making more profit per square foot of existing floor space. I never did find out what happened, there, because I sold my shares shortly afterwards, but this was, an still is , an astoundingly well managed retailing company. Don't you think that it is better to give the shareholders either increased dividends or increasing share value by buy backs rather than buy other bolt on companies, like Marks and Spencer did?

Split

 

[Jack o'Clubs]

There is diverse opinion about this tactic on the company's part. Peter Lynch, the famous Magellan Fund manager argued that it showed good management. Next PLC, for example, more than a decade or so ago, had over 120 million pounds in cash and admitted that it could not expand organically (that was part of its trading policy) and had to increase profits by making more profit per square foot of floor space. I never did find out what happened, there, because I sold my shares shortly afterwards, but this was, an still is , an astoundingly well managed retailing company. Don't you think that it is better to give the shareholders either increased dividends or increasing share value by buy backs rather than buy other bolt on companies, like Marks and Spencer did?

Split

Hi Split,

All I said is that I'd sound a word of caution about buybacks being an unreserved 'good thing'. It can be good news, but is not always so and it depends on the specifics of the situation. I'd rather see increased or special dividends than a buyback as the investor actually gets the cash in his greasy mitts, rather than a 'theoretical' uplift in share value because the company is buying shares. It also depends what the company does with the shares it buys back. If it holds them in treasury rather than cancelling them (as is often the case), then the value of the buyback can be eroded as investors worry that the company has just stockpiled shares with which to make a future acquisition.

In my case I would (and do) add higher credence to director buying over company buying, because you can bet that a company exec has thought very carefully before spending a few million on his company's shares - director buying is one of the ticks in the boxes I look for when buying for my long-term fundamental portfolio.

 

[Splitlink]

Hi Split,


In my case I would (and do) add higher credence to director buying over company buying, because you can bet that a company exec has thought very carefully before spending a few million on his company's shares - director buying is one of the ticks in the boxes I look for when buying for my long-term fundamental portfolio.

That's another point and one on which I would like your view. These options that directors get, but which have to be converted into shares on expiry. Where do they come into director purchase statistics? I've often wondered about this. On the surface, it appears that he is acquiring shares by purchase but he isn't, really. He may flog them at the first opportunity! Are these shares omitted in director purchase calculations?

Split

 

[Jack o'Clubs]

That's another point and one on which I would like your view. These options that directors get, but which have to be converted into shares on expiry. Where do they come into director purchase statistics? I've often wondered about this. On the surface, it appears that he is acquiring shares by purchase but he isn't, really. He may flog them at the first opportunity! Are these shares omitted in director purchase calculations?

Split

Split,

They're included, but usually notated as such (depending on where you get your data from). But you're right that you can't take much at face value without being prepared to do some homework/digging. If I was checking director deals, I'd also have the company's report and accounts which will show when options mature - they can then be cross referenced to the deals. It's also interesting to see when a set of options run into their exercise period, but the director is sitting on them, which again might be telling you a story if you were inclined to interpret it that way!

 

[Pat494]

Thx for the informed above comments. There is obviously more to this buy-back situation than it first seems. I expect REFs are useful here but too expensive for my liking.

 

[Pat494]

In my case I would (and do) add higher credence to director buying over company buying, because you can bet that a company exec has thought very carefully before spending a few million on his company's shares - director buying is one of the ticks in the boxes I look for when buying for my long-term fundamental portfolio.

Good point

 

[Rhody Trader]

Also the mark-up will occur instantaneously when the company announces the buyback, or even before, in anticipation, so it's difficult for a private investor to be ahead of the market in taking advantage (the share price uplift from a buyback is a simple calculation, and the market should discount it immediately).

This might be right in theory, roughly the same way a stock should trade down proportionately to the value of a dividend being paid, but in practice you cannot expect such action to take place. The biggest reason for this is that unlike a dividend, buybacks do not happen all at once, but rather over time. Thomson Financial actually recently put out a research piece that suggested only half of the announced buybacks from about the middle of 2005 to the end of 2006 were actually completed by the middle of 2007. At a minimum, that means they have been spread over time. In some cases, they might not have happened overall.

FYI, that same report suggested that this year's S&P 500 EPS growth was 20% attributable to buybacks (if I remember correctly).