Share buybacks by corporations - in whose interest ?

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Over the past three years since 2016, there has been a marked increase in the number of announcements of share buy-backs from ASX listed companies. Buy-backs are where a stock exchange listed company literally makes an offer to purchase its own shares from its shareholders thus reducing the number of shares on issue in the market. This approach has often been in tandem with a company having excess capital or funds available to it as a result of the sales of other businesses (where there are other brands which the company can offload) or capital raisings which are no longer needed or a high return from business operations in the preceding year. But how sensible are share buy-backs and in whose interest do they occur ?

The oft stated justification from companies is that a buy-back creates value by reducing the number of shares on issue and are a way of returning capital to shareholders.  Little other information ever eventuates such as the overall rationale for the decision - what is the target price being sought ? What is the intrinsic value per share ? What is the timeline for the buy-back ? Some of the announced buy-backs have also resulted in little to no actual share purchases occurring hence the tactic appears to be for other reasons - such as placing a floor underneath the price of shares particularly if short sellers have been active in the market.

A raft of companies have been doing these buy-backs including CSL, Qantas, AGL, Navitas, CSR, Oroton, Platinum Asset Management, Cardno, QBE to name a few.

Management consultancy, McKinsey & Co, has challenged the value of share buy-backs in terms of using it as a method of improving earnings-per-share (EPS) or total return to shareholders (TRS), both of which are key revenue measures of a company's performance. McKinsey's have noted in one example that a company had pursued an aggressive share buy-back over several years and reduced around 20% of the share capital on issue and thus increased its earnings per share by 8% yet the overall net income for the business had continued falling. The overall revenue situation remained poor and the market discounted the company's shares by 40% relative to the market index. McKinsey's also commented that companies rarely time their repurchases well.

Shareholders would be well-placed to question the value of a company using investment capital or worse, debt financing, for share buy-backs rather than being used for revenue generation or 'growing the business'.

New Year 2019 beckons

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As 2018 ends and 2019 starts, there are strong grounds for caution as to what the next 12 months will be like and what events may transpire.

The latest Economic Conditions Snapshot, December 2018 from McKinsey & Co shows increasing pessimism  about the overall economic outlook from executives around the world whether reflecting on their own domestic situation or globally.  While there is some glimmer of optimism in India and Latin America, overall executives are glum about the next 12 months whether in developed-economies or emerging economies.

The key risks are defined as being related to policy and politics and are considered 'the most pressing threats'.  The most commonly cited examples being trade policy, a China economic slow-down and the United Kingdom's exit from the European Union. Transitions in political leadership and geopolitical instability are the second most cited concern. Of particular note, rising interest rates have largely fallen ranking only fifth of the five most pressing issues.

Happy New Year !

2018 - a year of shareholder voting strikes on corporate remuneration

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It's not surprising given the raft of allegations concerning the conduct of Australian banks at the Royal Commission into Banking, Superannuation and the Financial Services Industry' plus various scandals with other corporations, that shareholders are showing their displeasure at the level of remuneration paid to senior executives and directors on ASX listed companies.

Under the Australian Corporations Act 2001 (Section 300A), companies listed on the Australian Stock Exchange (the ASX), must present a remuneration report at every Annual General Meeting which sets out the policies for the amount of remuneration paid to key management personnel as established by the company's governing Board. Key management personnel are typically the Chief Executive Officer and senior executives including directors on the Board itself. The report must show the nature of the remuneration and exact value including salary, bonuses, short and long term incentives, options on shares and an explanation on performance hurdles which apply.

Since an amendment to the Act in 2011, there is now a two strikes voting power and re-election process for the Board itself should shareholders find the remuneration report repeatedly unacceptable. What this means is that for the first strike, a 'no' vote of 25 per cent or more of the votes cast rejecting the adoption of the remuneration report at the Annual General Meeting is needed. Should this occur the Board is required to provide an explanation on the proposed action the Board will take or a reason for taking no action on the remuneration report. If, in the following year at the next Annual General Meeting, a 'no' vote of 25 per cent or more occurs again, there must be a 'spill' motion of the positions of all members of the company Board responsible for the remuneration report at that meeting. 

For the spill motion of the Board to succeed, the resolution must be passed with 50 per cent or more of eligible votes.  Should the 'spill' motion succeed, within 90 days the directors must stand for re-election to the Board.

In 2018 there were a record number of first strikes for many companies -

Company Name and % of votes against the remuneration report:

National Australia Bank  88.1%
Mineral Resources  63.62 %
AMP  62.20%
Telstra Corporation  61.98%
Harvey Norman  50.63%
NRW Holdings  49.05%
Westfield Corporation 47.50%
QBE Insurance  45.60%
Goodman Group  45.46%
Tabcorp Holdings  40.40%
Myer Holdings 38.17%
Austal Limited  37.24%
Karoon  37.05%
Computershare  31.89%
Healthscope  29.29%
APA Group  24.96%

Many other companies received a high level of 'no' votes but not sufficient to reach the 25% threshold of a first strike. These include Ramsay Healthcare, MYOB, Japara Healthcare, Challenger Limited, JB Hi-Fi, Seek, Qube Holdings, IOOF Holdings, APN Outdoor, Coca-Cola Amatil. All of the companies with a first strike will need to work hard to avoid a second strike in 2019.

Christmas 2018

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Christmas, a time of celebration, a time for relaxation with family and friends. The Christmas celebration  itself is a mixture of orthodox religion, tradition and pagan ritual. The Christmas tree itself originates from medieval eastern Europe before being adopted in Lutheran Germany and thereafter across the Christian world mainly during the later 19th century. Decorations on the tree were much less flash and sparkly in the 19th and early 20th Centuries with coloured paper roses, wafers, apples and other small edible items. Only later were candles added and in the 20th century the Christmas tree became a light show in itself.

Wherever you may be, happy Christmas !