Derek Pain: City heavyweight joins campaign against buy backs

Buy backs rarely benefit all shareholders. I believe that companies with money to splash around should reward their investors with cash payments and not indulge in buying in their own shares. But such an attitude finds little support in the City.

Still, the anti-buy back camp has gained an influential supporter in the shape of Terry Smith, who has fulfilled many stock market roles with distinction. He says: "Simply by executing a share buy back rather than paying out dividends, companies can inflate their earnings per share and are almost universally seen to have created value for shareholders when mostly they clearly have not."

Some years ago I commented on a buy back by Rank, the bingo and casino chain. I was astonished that at a time when it appeared the dividend would be cut, it lavished £200m buying its own shares. Its activity had, at best, a muted impact on the share price. It seemed to me that the exercise was a complete waste of money.

There are, I suppose, occasions when a company assimilating its own shares makes some sense. A huge bank balance and a very low share price could be an excusefor reducing the number of shares in circulation. But a sharp dividend increase would surely workwonders for any depressed shares.

Directors are fond of buy backs (often euphemistically described as "returning cash to shareholders") because they favourably influence earnings per share, the yardstick invariably used when salaries and bonuses are set.

There is growing anger at the lavish way many executives are rewarding themselves these days. Inflated pay and perks, often in the form of share options, cash bonuses, over-generous pay packets and undeserved benefits, create considerable ill feeling, but questionable remuneration packages are invariably approved, with many City big guns meekly surrendering when it comes to the crunch.

Buy backs, like many other City exercises, ignore small shareholders. They are not in a position to take advantage, unless they are exceedingly lucky enough to hit the stock market when a buying operation is underway. It is the institutions, much closer to City events, that benefit.

Concludes Mr Smith: "Most share buy backs destroy value for the remaining shareholders."

There are a number of ways cash can be returned to all shareholders. Increasing the dividend is the most obvious method. Special cash payments, share consolidations and even loan notes are other routes.

I hope the intervention of Mr Smith adds weight to the opposition to what is an unattractive activity, encouraged by commission-hungry corporate advisers.

He has enjoyed a colourful career. A former analyst, he co-authored a controversial book about dubious but legal company accounting; went on to develop the stockbroker Collins Stewart; and is chairman of the money broker Tullett Prebon.

He is now trying his hand as a fund manager, and has promised that his operation, called Fundsmith, is a low-cost fund that will give the "fat and complacent" fund management industry a "bloody nose".

Although buy backs rankle, I remain deeply concerned about the unfair practice of private share placings when the chosen few are invited to buy shares at a significant discount to the then ruling stock market price under the banner of injecting cash into a company. I have attacked such an undesirable habit, which leave the vast majority of shareholders out in the cold, many times. I was, therefore, pleased that City of London Group, a former no pain, no gain portfolio constituent, opted to accompany a placing with an offer to all shareholders.

At one time CoL was an internet, investment and public relations group. It has changed its spots. The successful portfolio remains, but the company is developing in such areas as fund management, litigation funding and trade finance. All-told it is raising £7.5m. Most, £5.2m, has arrived via a placing but, at some expense, it hopes to pull in up to £2.3m via an open offer. Shares have been sold at 83p against a ruling price of around 92p when the cash call was announced.

CoL shares have had a colourful existence since arriving on the stock market in 1996. At the height of the dot.com madness they hit 950p. But like so many others, as sanity returned, they collapsed, at one time going below 40p.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    The Jenrick Group: Night Shift Operations Manager

    £43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

    SThree: Trainee Recruitment Consultant - LONDON

    £20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

    Day In a Page

    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all
    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there