There are only 2 weeks of PGDA left until the students leave for a well earned study break. The final few Financial Management topics are focused on corporate finance and this week is no different – Dividends and Share repurchases.
Here are some interesting stories that show the relevance of this topic:
- Invicta admitted to a “reportable irregularity” related to share repurchases. Well done to their auditors, Deloitte, for reporting it. In summary it in involved directors selling their shares to the company as it was performing a buyback. The full story was front page of the Financial Mail on 25 August 2016 and can be read here.
- In a low interest rate environment, a dividend has been an attraction for investors. Here is a great article from BizNews (although it is a little dated) about which companies on the JSE pay dividends and why they might no longer be able to.
- Once a dividend is expected, management are loath to cut it. This is powerful shown in the quote from Pan African Resources CE Cobus Loots, “We have an obligation to our shareholders to continue to pay our dividend. I don’t want to have to go to our investors and explain why we’re not paying a dividend.”
- Credit Suisse have analysed this issue indepth and have made their report public. The full report on dividends and share repurchases focuses on the USA but the concepts are applicable globally. It is a long read at 71 pages but there is an executive summary!
- Research on SA share repurcashes has been completed by Dr Nicolene Wesson from Stellenbosch. Her PhD thesis was on the topic and The Sunday Times wrote a summary.
- There is some creativity involved in how dividends can be structured. This Aussie mining company has given shareholders the choice of gold or cash. These Japanese companies give shareholders products (like noodles and ham). This chain of 7 Mexican restaurants in London offers burritos allow with interest to investors.
- Some countries have specific laws governing dividends. In South Korea for instance a new law was implemented in 2015 that punishes companies that don’t return cash to shareholders. The stock market has seen good growth since the law was in force.
- Share repurchases can be a means of reducing the equity dilution caused by giving management share options. If management are exercising their options and the company is therefore issuing many new shares, existing shareholders would start to notice. This is well articulated in the following lettter to The Economist:
You point to share buy-backs as a quick fix for stagnating businesses (“The age of the torporation”, October 24th), but look deeper and it is worse than that. Big tech players in America like Cisco, IBM, Microsoft and Intel have bought back billions of shares in recent years, mainly to soak up share grants issued to management and employees. Shareholders in these companies see little benefit from the vast sums expended. IBM spent $121 billion on buy-backs over the past decade, nearly 100% of its $129 billion market capitalisation in 2005, yet its share count has only been reduced by 40%.
As these grants turn into new shares earnings per share take a hit, so management are driven to sterilise this dilution with more buy-backs. Buy-backs are a way for managers to pay shareholder’s funds, to management. At best, buy-backs at large tech giants are a waste of money; at worst it’s a way of fiddling the accounts.
Manager of the Lombard Odier technology fund
I hope you enjoyed seeing the relevance of this topic. Please share any interesting stories or questions in the comments section below. All the best with these final few weeks!