Derek Pain: City heavyweight joins campaign against buy backs
Saturday 30 April 2011
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.
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