RE: Buyback5 Apr 2022 18:38
Earl
"The buyback has been an outstanding success ....... etc "
May I ask who for, as I cannot see it !
From an old Moneyweek posting:
A very ugly practice that could ruin your returns
Share buybacks have become all the rage recently. But they do nothing for shareholders. Instead, they are all about lining management's pockets. Bengt Saelensminde explains why, and how to find companies that are truly acting in your interests.
Sometimes I wonder whether company directors even like shareholders.
This week I saw a number of companies partake in a particularly insidious activity one that does very little to serve the interest of their shareholders.
I'm talking about a share buyback.
Over the last ten or twenty years, share buybacks have become all the rage and I don't think it's just coincidence that they appeared at the same time as management incentive schemes.
Today I want to explain why share buybacks serve management well, but may leave shareholders worse off. Once you understand the trick, you'll see what to look out for in companies that are truly acting in your interests. In fact, I'll even point you in the direction of a few.
It's about management lining its pockets
With a share buyback the company buys its own stock in the market, as if it were just another investor. Once it's bought the stock, it cancels the shares. It's as if the shares never existed.
Why would they do that?
Well, the management tell us that it improves earnings per share (EPS). If earnings stay the same and you reduce the number of shares, clearly that's true. It's simple really management shells out your money on shares and hey presto the accounting figures look better.
But we all know you can't just magic up better earnings figures without making more profit. This money comes from somewhere and that somewhere is your pocket. So why do our representatives play along with this?
Well, here's my theory. These days a major part of remuneration comes from share options. To see how the proportion of CEO pay has changed over the last 20 years just look at this chart.
The green box represents long-term incentives (LTI's); they were practically non-existent 20 years ago. So how do these incentives work? Well, generally they're payments that are triggered by hitting EPS targets and options triggered by hitting short-term share price targets.
Clearly there's a massive incentive for management to enhance EPS and hit short-term share price hurdles. As the chart shows, these incentives are way more important to management than their basic salary.
But hang on, I hear you say. Isn't growing EPS great for shareholders too? Isn't it what we all want?
Well err, yes. But at what cost and over what time frame?
The problem is, it's the shareholder that pays for bumping up the share prices. Management raids shareholder cash to buy stock. And just imagine the City traders rubbing their hands when they see an announcement that Mug PLC is about t
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