Both plastic packaging specialist RPC (RPC) and shopping centre and office investor British Land (BLND) are adding their names to the list of companies pursuing share buyback programmes – reigniting the debate over the relative merits of this form of returning cash to shareholders.

On 18 July British Land announced plans to purchase £300m of its shares, the first UK real estate investment trust to do so in nearly 10 years. A day later RPC, which has seen its shares slump in 2017 on growing doubts about its acquisition strategy and cash flow performance, announced its own £100m buyback.

There are two main ways a company can return cash to shareholders although there are variations. They are dividends (either regular or one-off) and buybacks.

PROS AND CONS

The positives to take from a buyback is they can be more tax efficient for shareholders assuming they would prefer to be taxed on a capital gain than the income from dividends, if you opt to retain your shares you will have an enhanced stake in the company and will be liable for more dividends in the future (if they are paid) and finally it implies the management team of a company, rightly or wrongly, believe the shares are undervalued.

Unfortunately they often get this bit wrong. AJ Bell investment director Russ Mould says: ‘History shows companies have a habit of buying stock back during bull markets (when their stocks tends to be more expensive) and not doing so during bear ones (when their stock tends to be much cheaper). For example, buybacks in the US peaked in 2007 and collapsed in 2008 and 2009 only to accelerate again in 2011 and 2012.’

Mould notes BP (BP.) has spent $61.4bn on buybacks since the year 2000 but has a lower share price 17 years on as the market worries about its capacity to maintain its dividend.

Also buybacks can be a cynical way of boosting earnings per share by reducing the number of shares in issue to massage performance and potentially trigger management bonuses.

NOTHING LEFT TO BUY

So why have the two latest companies to launch buybacks gone down this road? British Land says strong demand means the opportunity to acquire new assets at attractive returns is ‘more limited than usual’ and adds buying its own shares is a ‘clear value opportunity’ given a substantial discount to net asset value (NAV) and a 5% dividend yield.

Industry standard NAV at 31 March was 915p per share, implying a 32% discount even after a solid share price rise.

British Land trades at a discount due to fears of a correction in the UK retail and office properties which dominate its portfolio.

Jefferies analyst Mike Prew has an ‘underperform’ rating on the stock and a 500p price target. He says: ‘We would sell all the stock we could into this liquidity window.’

He notes it is a decade since a planned share buyback at British Land before the full onset of the financial crisis.

‘It’s the 10th anniversary of CEO Stephen ‘the equity market’s too gloomy’ Hester’s £500m share buyback at a pre rights price of £14, which was quickly pulled. 2017 looks like a rerun of 2007 and CEO Chris Grigg’s gamble of running more leverage risk anticipating an extended real estate cycle is faltering as global bond yields rise.’

RPC’s own buyback announcement was accompanied by a range of other measures aimed at reassuring investors on the company’s strategy – including a commitment to dial back on acquisitions and a shift in management incentives to align them with cash flow and return on capital employed rather than earnings.

DRINKING THE KOOL-AID

Mould says chief executive Pim Vervaat’s argument that RPC shares undervalue its performance to date and future prospects should be ‘treated with a degree of caution’.

‘In 26 years of following companies no CEO has ever told me that he or she thought his or her company’s shares were overvalued and ultimately it is the executives’ job to manage the assets under their control, not to manage the share price,’ he adds.

‘If they do a good job, the share price will take care of itself over time, as the company builds and develops and protects its competitive position, husbands its resources well, focuses on long-term risk and reward when it invests and ultimately generates the free cash flow which funds healthy dividend payments for shareholders.’

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