The ludicrous practice of the share buy-back

The fashion for a company buying-back its own shares was financial stupidity in the extreme. You could say that this judgement comes with the benefit of hindsight, but actually not so. I have a secondary interest in a Leisure Sector business that bought back a substantial tranche of its own shares a few years ago. To do so, it borrowed a huge sum of money and of course cancelled the shares in question. It seemed to me stupid at the time and almost catastrophically stupid now

Aside from the cynical point that most parties benefited financially from the actual transaction, that is to say, city advisers, management as incentivised on earnings-per-share performance and institutional investors for a brief time, any logical oversight would conclude that the transaction was artificial. If the shares at the time were worthy of purchase, why was not Joe ordinary investor buying? Exactly one year ago, 77 companies were purchasing their own shares. The FTSE stood at 6,300. To give just two examples (there are plenty more), Alliance & Leicester were buying at 614p (one year earlier they bought their own shares at more than £12). A&L was sold to Santander at 317p and HBOS was buying its shares at 783p and these shares have since dropped by about 90%.

Debt from trading or service providing is one thing, debt from financial engineering is quite another.

jgs-2008

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