Stock Market Week: pounds 10bn in cash-backs - and that's just a start
Monday 22 March 1999
Last week, Tomkins, the struggling buns-to-guns conglomerate, jumped on the cash-back bandwagon with plans for a pounds 400m buyback, and this week fellow engineer Glynwed could follow suit.
The two metal bashers join a list of capital returners that includes blue-chips such as Halifax, Centrica, the Woolwich and Gallaher, and undercard members such asHazlewood Foods and Charter.
In total, over pounds 10bn has been earmarked for shareholders' pockets in the first two months of the year, including a massive pounds 2.1bn coming the way of UK investors in the Anglo-Dutch consumer giant Unilever. Market watchers believe that there is a lot more to come and predict a record year for cash-backs, with pounds 20bn set to be paid back - more than twice last year's total.
These bumper returns should underpin the market. The funds will go to increase the already large pool of money available to investors, boosting demand for stock. With equity supply restrained by takeovers and a dearth of new issues, the omens for share prices are looking good.
The reasons for the handout bonanza lie in a shift in the relationship between companies' managements and investors. Gone are the days when sleepy boards could let cash piles rot for ages on their balance sheets. The new creed of shareholder value - that is, making money for your investors - dictates that funds not used for acquisitions or investment be speedily sent back to institutions and punters.
The favourable tax treatment of debt compared to equity is also a spur to gear up the balance sheet and return cash.
Handing back idle money is all well and good, but the key issue is how you do it. Of the three traditional instruments - share buybacks, special dividends and capital restructurings - buybacks are by far the most inequitable. For a start, not all shareholders receive capital on an equal basis.
Private investors tend to lose out to bigger institutions as shares are bought in the market where the pension funds are kings. Moreover, buybacks reduce the number of shares in issue, boosting the company's earnings per share. Given that most executives' bonuses are linked to EPS growth, it is easy to see how buybacks allow the great and the good to marry shareholder value with their personal fortunes.
Special dividends are much fairer than buybacks as every investor is treated equally and there is little EPS distortion. Extra dividends plummeted to just over pounds 1bn last year from pounds 3.6bn in 1997, but they are enjoying a renaissance this year, thanks to the Woolwich pounds 236m handout and Unilever's multi-billion pound payment.
By contrast, the appeal of capital restructurings, used by the Halifax for its pounds 1.5bn payback, is fading fast as the demise of advance corporation tax will wipe out most of their tax advantages.
Of course, share repurchases are just more than "mucking about with the EPS", as one dealer put it. As Associated British Ports, which is buying back pounds 50m, and Tomkins would argue, rolling buybacks are the ideal tonic for a depressed share price.
So far this year we have seen few repurchases, around pounds 650m in total, but we could be in for a busy spring. David McBain and Bob Semple at BT Alex.Brown, believe that next month's abolition of ACT will "open the buyback floodgates". The drug giant SmithKline Beecham, for one, has already hinted at a pounds 5bn repurchase after ACT goes and BG, the former British Gas, could also go for a pounds 1.5bn cash return.
Glynwed could this week add to the cash sloshing around the market. The engineer, results on Wednesday, has some pounds 300m of surplus capital after shedding some of its metals processing businesses to focus on making pipes. The sale of other non-core operations should provide further firepower. The results will be hit by the restructuring, which also included the pounds 174m purchase of the German pipe-maker Friatec, and tough markets. Profits should be 15 per cent lower at pounds 78m.
Glynwed is one of several engineers set to dominate the results schedule this week. The Scottish pump maker Weir will have a tough time. The company will have to justify its go-it-alone strategy after rejecting a 300p-a- share bid from its US rival Flowserve. It will not be easy. Profits will probably rise marginally to around pounds 63m from pounds 60m, but the outlook for this year is bleak, as manufacturers,Weir's main customers, continue to suffer.
LucasVarity will complete the engineers' hat-trick. Profits, set to rise some 5 per cent to pounds 346m, are largely academic as Lucas is being bought by the US group TRW for $6.7bn. The interesting bits are the cost of Lucas's botched attempt to move its domicile and listing to the US, probably pounds 13m, and the impact of the General Motors strike, say pounds 11m.
Lucas will be joined by P&0 as one of the few blue-chips to unveil figures. The ferry and cruise group could increase its dividend for the first time in nine years after sailing to a 10 per cent profit advance to around pounds 400m. The cruise division will be the main driver of growth. Richard Hannah at BT Alex.Brown believes that two new ships should have propelled operating profits 26 per cent higher to pounds 220m. Expect some moaning over the abolition of duty-free shops on cross-channel ferries.
Next should lift some of the gloom surrounding the high street. Profits will be down, say 10 per cent to some pounds 160m, owing to a poor first half. However, the upgrade of its merchandising and buying systems should have boosted trading in the latter part of the year. All eyes will be on current trading comments following a profit warning from Arcadia and bearish retail sales figures.
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