Tuesday, 29 January 2013

US share buy-backs and dividends increases in two charts

"If you ask a firm's management, they'll likely tell you that a buyback is the best use of capital at a particular time. After all, the goal of a firm's management is to maximize return for shareholders and a buyback generally increases shareholder value. The prototypical line in a buyback press release is "we don't see any better investment than in ourselves." Although this can sometimes be the case, this statement is not always true." - source www.investopedia.com 

- Source - Societe Generale US Credit Research.

Increasing buy-backs in conjunction with rising dividends:
- Source - Societe Generale US Credit Research.

"The Bottom Line: Are share buybacks good or bad? As is so often the case in finance, the question may not have a definitive answer. If a stock is undervalued and a buyback truly represents the best possible investment for a company, the buyback - and its effects - can be viewed as a positive sign for shareholders. Watch out, however, if a company is merely using buybacks to prop up ratios, provide short-term relief to an ailing stock price or to get out from under excessive dilution."  - source www.investopedia.com 

For us, buy-backs are credit negative if it means buying-back using leverage and more debt, particularly for banks given it reduces the equity buffer needed in case of trouble. 

Increasing debt to fund share buy-back is a trend we have seen lately. It might be more efficient from a tax point of view given interest on debt is deductible, but, remember, a debt has to be repaid at some point...

Share buy-backs do eat into FCF (Free Cash Flow). While we recently touched on the return of LBOs with the example of DELL inc ("The return of LBOs - For whom the Dell tolls"), from a credit perspective, in similar fashion to LBOs, the rising trend in share-buybacks using debt finance warrants close monitoring in this "Yield Famine" induced environment of "Financial Repression", where the "credit mouse-trap" has been set up by Central Banks.

"If you do not change direction, you may end up where you are heading." - Lao Tzu 

Stay tuned!

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