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Seems to me BP.s new bonus scheme is similar to the one introduced by SHEL 25yr ago.

One of my longest held and successful shares. Seems strange that it gets so little attention. A twenty bagger over 30 or so years.

‘ plus a more steady dividend growth (5%) expectation.”

Not 5% but 2% growth in dividend per share now, but with buybacks as well. And, because of the buybacks the “pot” used to pay dividends will be less than 2%.

‘A rights issue is a very legitimate way to raise new capital for investment by an established business, which BP PLC clearly is.”

Yes it is legitimate, but, I for one, dislike companies wanting more of my cash by inducements - offering shares at a discounted price, which, if not taken up, is destructive to shareholders value. Mr Market has a similar view and the SPs mostly takes a beating. I’m only happy if the cash raised is accretive to the status quo. I’m not sure its use to pay down debt is.

There is always a fine balance, in my view, between debt and equity and share the consensus view that BP has got this balance wrong and needs to re-equilibrate to a a less onerous level.

Meoryou: You May be right.

If you look at the annual report, and see the vast number of pages dedicated to executive reward, I wonder whether a similar large amount of management and staff time is not focussed on this matter, rather than focussing on the business in hand?

@ Primetime51. Yes I agree. However, if the BoD are of the opinion that the shares are truly undervalued when they buy them back, and they are of the opinion that can resell the treasury shares to the market at a higher price when Mr Market is more logical - and pocketing a profit for the company - is this such a bad thing to do I wonder? That’s what we all do after all.

The question to my mind is: - does this allow for more prudent management of funds, or offer more flexibility, than paying down debt?

What I don’t like is these treasury shares being used to reward bad performance. But still more transparent than issuing shares for the same purpose as some companies do.

Apra pro Sawan’s comments that SHEL may prefer share buybacks with share cancellations to the acquisition of BP, I found Buffett’s view on share buybacks vs acquisitions interesting - as well as his general view on buy backs per se.

Maybe of interest to some.

https://www.cnbc.com/2018/08/31/warren-buffett-explains-the-enduring-power-of-stock-buybacks.html

“There is a difference from a personal tax view, it is cheaper for CGT”

Yes and no. Fit basic rate taxpayers it is more advantageous, from a tax point of view, to have dividends paid.

Income Tax Bracket Income Range Dividend Tax Rate. CG Tax Rate

Basic rate taxpayer. £12,571 to £50,270 8.75%. 18%

Higher rate taxpayer £50,271 to £125,139 33.75%. 24%

Additional rate taxpayer Over £125,140 39.35%. 24%

Correction: Chubb is Swiss based, US listed.

Buffett has recently bought into Chubb, a US insurer. Chubb is interesting because, unlike LGEN and AV, it rewards shareholders mostly through large cancelled share-buybacks while only paying a very modest dividend. Taking Meconopsis’s point about the meaningfulness of piddling share-buybacks on the SP, Chubb’s share price appreciation over the last years is a good demonstration of just how effective they are when carried out with scale.

“Buybacks always have an effect! It’s just the share price might not always reflect it as stocks go up/down depending on market conditions. However that buyback will ALWAYS help.”

I agree entirely.

For me to understand the (fundamental/theoretical) value of share-buybacks/cancellations on a SP, I found it useful to start by considering what the value of a company is intrinsically worth independent of the current market position. This intrinsic value is defined by Buffett as the book value plus the sum of all future cash generated in perpetuity and discounted an appropriate rate. So if the book value rises so will the intrinsic value assuming future earnings are unaffected. Buffett argues - correctly it seems to me - that over time the SP should reflect that intrinsic value.

So if a company generates cash over time, and does not hand any of this cash back to its shareholders, the SP will rise as the company’s intrinsic value rises due to positive earning. A plot of intrinsic value or SP vs time would result upward sloping line, or a downwards one if the intrinsic value falls due to negative earnings. I suppose an analogy could be a long-term deposit account with interest rolled up.

And, if at any time the company hands back cash as dividends to shareholders, the intrinsic value - and hence SP - will fall on going exdiv. The intrinsic value of the company, and hence the SP, will then rise again as the company generates cash and so forth. A plot of SP against time would resemble a saw tooth - the saw sloping upwards if the company pays out less cash than it earns, or downward if visa versa.

If instead of dividends, the company hands back cash by buying back shares and cancelling them, the SP won’t fall as it does with dividends - or rise immediately for that matter - as the fall in intrinsic value on spending cash will be exactly balanced by their being fewer shares in issue resulting in no immediate change in the SP. But the SP will thence forth rise reflecting the cash being generated in future by the company. A plot of SP against time would resemble a smooth upward sloping curve even if all the company’s earnings are paid out. Essentially shareholders are getting a bigger ownership share of the company.

So theoretically share-buybacks/cancellations must increase the SP over time (but not immediately) all other factors being equal. But sentiment and ensuing temporary supply/demand imbalances will affect Mr market’s mood, and possibly/probably masking these fundamental trends in the short term.

I am a fan of share buybacks cancellations because of my tax situation, but only if the shares are bought back when the shares are “cheap” as we would on buying shares. Unfortunately companies, once given the authority, will buy back whatever the price as their agenda is elsewhere, so the outcome is not always ideal.

Investrat - the independent non-execs are paid a fee for their services. As far as I can ascertain there is no performance related element to their pay. But, yes, the renumeration committee recommends these fees and the executives pay package for endorsement or otherwise by the shareholders.

It seems that a big chunk of the Execs performance package is determined by an adjusted EBITDA figure (Munger “bull!!1! Earnings). It is little wonder the BP is in the mess it’s by excluding interest and capital expenditure from the pay deliberations. It is not the amount they are paid that bothers me that much. What bothers me is how it is determined.

Shareholders need to wise-up - 90% of the time I vote against the renumeration reports but we small in number , or too lazy, to make any difference. Amongst the II, it is a case if you scratch my back……..

‘Ideal is 4pc capital appreciation to offset inflation, and reliable increasing divi above 4 or 5pc. !!!!!”

Banks may fall into this category but they are highly geared/levered so don’t come without significant risk.

Meconopsis. I don’t think II have the correct figures for CGT on share appreciation. My understanding is that it is 18% for the Basic Rate taxpayer and 24% for the two higher Rates taxpayers.. Ref 2024 Autumn budget.

Share buybacks which should cause SP appreciation over time are tax efficient vs dividends for higher rate taxpayers, but are a lousy option for basic rate taxpayers from a tax point of view.

Freeposter. There is no longes a 10% withholding tax. The rates are straightforward : Basic rate, 8.75% ; Higher rate, 33.75% ; Additional rate, 39.35%. It’s as simple as that.

Basic rate taxpayers - or non income tax payers but tax resident - are hammered with CGT at 18%. The others pay “only” 24%.

Aktonet. If interest rates go up bond prices go down and visa versa. So the value of a portfolio of bonds will decrease if interest rates increase affecting the current accounts of a company like LGEN. Long dated bonds - which LGEN will also hold - will be the most affected.

Say you have a bond of maturity value £100, with a coupon rate (the interest rate on the maturity value of an issued bond) of 5%. No one would buy you bond for £100 if the interest rates increased to 6% as they could get 6% elsewhere. Your bond would consequently fall to a value that would give a buyer 6%.

I’m not sure that it is debt per se that is good. What I think is good is getting the right balance between debt and equity. Equity is expensive but has no risk for a company - that risk being taken by the shareholders. Debt is cheaper (normally) than equity but more risky for a company as loans can be withdrawn at any time by lenders leaving a company up a creek without a paddle. Equity cannot be withdrawn.

If banks believe BP is no longer viable they will withdraw their money and BP could crash - unlikely as that may seem at the moment.

Banks themselves are high risk as they are highly levered (900%) as the financial crisis will attest to.

From a fundamental point of view the consequence of share buybacks on the SP can be simply viewed using elementary maths.

SP = (Intrinsic Value of company)/(Share in Issue) = IV/SI. IV decreases when company money is used to cancel bought back shares, or issue them to staff and/or pay dividends.

All the below presupposing that the prices paid for the shares are the same and costs/taxes are neglected.

Stares held in Treasury: IV&SI unchanged. SP unaffected as no value given to shareholders. Same result if no shares were bought back and cash held. Surely better use of funds from a shareholder perspective.

Shares cancelled. IV down; SI down proportionally. SP consequently unaffected but shareholders have a greater percentage ownership of company so greater share of future earnings. Mathematically the same ownership result if equivalent cash spent on dividends, and that those dividends are used to reinvest in more shares by shareholders.

Treasury shares given to staff: IV down; SI same so SP down as value extracted from shareholders. Shareholders pay for staff costs one way or another.

And of course Mr Market will want to have his say wrt sentiment and temporary supply/demand

“Shell are not interested in BP because they have stated that buybacks provide better value than acquisitions”

Surely, in the end, it all depends on the price of the target company and how, after taking into account all the costs and synergies of the acquisition, the effect is to enhance or dilute key profitability indicators of the buying company.

Take for example the Return On Capital Employed indicator which, to my mind at least, is key as companies with high ROCE tend to be the most profitable over the long term. So, if the acquisition lowers the ROCE of the buying company it would be bad - if it raises it would be good.

So if the former would it not be better for a company to buy back its own shares which it would be doing at existing ROCE figures - neither accretive or dilutive. Better still to employ that capital in accretive projects, but those are seemingly few and far between. It is incredibly easy to spend capital unwisely as Buffett keeps reminding us.

I too have seen too many examples where company size seems to take sway in CEO’s eyes rather than the profitability of the business - destroying shareholder value along the way.

I’m sure Shell will very careful in their deliberations and draw the right conclusions.

Interesting comments as I take a different view as an investor who is only interested in the fundamentals of a business and buy with a long term view. I would back Shell as I believe it has superior management and I’m particularly impressed with Wael Sawan the current CEO. Personally I would not like to see him buying BP as this would, to my mind at least, be a distraction from his well reasoned current strategy.

But having said that I am biased as Shell is one of my core and longest held holdings. It has served me well for ca 45 years and I have only - on occasion - sold to balance my portfolio. A bottom drawer stock in my opinion.