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; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
  • Get to the point
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

    Neil Pavier: Commercial Analyst

    £50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

    Loren Hughes: Financial Accountant

    £45,000 - £55,000: Loren Hughes: Are you looking for a new opportunity that wi...

    Sheridan Maine: Finance Analyst

    Circa £45,000-£50,000 + benefits: Sheridan Maine: Are you a newly qualified ac...

    Sheridan Maine: Financial Accountant

    £150 - £190 Daily Rate: Sheridan Maine: One of London's leading water supplier...

    Day In a Page

    No postcode? No vote

    Floating voters

    How living on a houseboat meant I didn't officially 'exist'
    Louis Theroux's affable Englishman routine begins to wear thin

    By Reason of Insanity

    Louis Theroux's affable Englishman routine begins to wear thin
    Power dressing is back – but no shoulderpads!

    Power dressing is back

    But banish all thoughts of Eighties shoulderpads
    Spanish stone-age cave paintings 'under threat' after being re-opened to the public

    Spanish stone-age cave paintings in Altamira 'under threat'

    Caves were re-opened to the public
    'I was the bookies’ favourite to be first to leave the Cabinet'

    Vince Cable interview

    'I was the bookies’ favourite to be first to leave the Cabinet'
    Election 2015: How many of the Government's coalition agreement promises have been kept?

    Promises, promises

    But how many coalition agreement pledges have been kept?
    The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

    The death of a Gaza fisherman

    He built his own reef, and was fatally shot there by an Israeli gunboat
    Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

    Saudi airstrikes are fuelling the Gulf's fire

    Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
    Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

    The only direction Zayn could go

    We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
    Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

    Spells like teen spirit

    A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
    Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

    If fashion is a cycle, this young man knows just how to ride it

    British designer Jonathan Anderson is putting his stamp on venerable house Loewe
    Number plates scheme could provide a licence to offend in the land of the free

    Licence to offend in the land of the free

    Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
    From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

    From farm to fork in Cornwall

    One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
    Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

    Robert Parker interview

    The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
    Don't believe the stereotype - or should you?

    Don't believe the stereotype - or should you?

    We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor