Why share buybacks are nothing like dividends

Share buybacks are a clever way for companies to push up their share prices. But are they such a good thing for shareholders? Phil Oakley reports.

When big companies buy back their own shares, it's often pitched as a return of cash to shareholders', not unlike a dividend.

But don't let them pull the wool over your eyes. Buybacks are nothing like dividends, and in general, they're far better for managers and big institutions than they are for small shareholders.

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Operating profit1,0001,0001,0001,000
Interest20000
Profit before tax1,0201,0001,0001,000
Tax at 30%-306-300-300-300
Net profit714700700700
Shares in issue1,000909.09875.00928.57
Earnings per share71.477.080.075.4
Cash1,000000
Shares bought backRow 8 - Cell 1 90.91125.0071.43
Price bought backRow 9 - Cell 1 1,1008001,400
Value of operations10,00010,00010,00010,000
Cash/Debt1,000000
Value of equity11,00010,00010,00010,000
Shares1,000909.1875.0928.6
Value per share (p)1,1001,1001,1431,077
P/e ratio15.4114.2914.2914.29

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.