How to tell if a company 'share buyback' makes sense

While never as attractive as a dividend, share buybacks can sometimes be a good use of company money, says Phil Oakley.

Share buybacks when companies buy their own shares on the stock exchange and cancel them are all the rage again. In America, they are back at the same levels that we saw before the financial crisis, according to data firm FactSet. They are very popular here in Britain too.

So let's make one thing clear right away. We don't like buybacks. If a company wants to return cash to shareholders', we'd rather have a dividend payout. This is money in the bank that can't be taken away again in the future.

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A. Share price£62.75
B. Shares in issue155.03m
C. Market cap. (AxB)£9.728bn
D. Cash for buyback£300m
E. % of shares acquired (D/C)3.08%
F. EPS enhancement (1/(1-E))3.18%
G. Company profit£740m
H. Profit needed for equivalent EPS rise (GxF)£23.55m
Equivalent rate of return (ERR) (H/D)7.85%
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Next6,275p£300m*3.13%7.72%6,160p1.87%
Rightmove2,469p£66.8m#2.76%4.02%1,273p93.89%
BATS3,083p£1,500m2.64%10.11%3,875p-20.44%
Compass938p£500m3.07%7.48%879p6.71%
Imp. Tobacco2,270.36p£500m2.34%10.15%2,865p-20.76%
BSkyB854.5p£500m3.85%9.14%972p-12.06%
*Next surplus cash flow # Rightmove buyback of 2012.

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

 

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

 

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.