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.
Mark Dampier: How to get an income now that savings are past the 'use by' date
Thousands of UK investors could lose out following collapse of Secured Energy Bonds
Bargain Hunter: Fly off for a winter break in France or Portugal for well under £100
Millions in line for compensation after being sold unnecessary credit card cover
Weekly Money: Round-up of the personal finance stories you may have missed 26-30 January
- 1 Three-year-old boy shoots pregnant mother and father in New Mexico
- 2 Stephen Fry explains what he would say if he was 'confronted by God'
Stephen Fry explains what he would say if he was 'confronted by God'
The open loathing between Barack Obama and Benjamin Netanyahu just got worse
9 reasons Greece's experiment with the radical left is doomed to failure
President Putin is a dangerous psychopath - reason is not going to work with him
Have we reached 'peak food'? Shortages loom as global production rates slow
Britain's widening poverty gap should be causing outrage at the start of the election campaign
iJobs Money & Business
£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...
£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...
£13000 per annum: Recruitment Genius: This Pension Specialist was established ...
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...
Day In a Page
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion