City heavyweight joins campaign against buy backs

Buy backs rarely benefit all shareholders. I believe thatcompanies with money to splash around should reward their investorswith cash payments and not indulge in buying in their own shares.But such an attitude finds little support in the City.

Still, the anti-buy back camp has gained an influential supporterin the shape of Terry Smith, who has fulfilled many stock marketroles with distinction. He says: "Simply by executing a share buyback rather than paying out dividends, companies can inflate theirearnings per share and are almost universally seen to have createdvalue for shareholders when mostly they clearly have not."

Some years ago I commented on a buy back by Rank, the bingo andcasino chain. I was astonished that at a time when it appeared thedividend would be cut, it lavished 200m buying its own shares. Itsactivity had, at best, a muted impact on the share price. It seemedto me that the exercise was a complete waste of money.

There are, I suppose, occasions when a company assimilating itsown shares makes some sense. A huge bank balance and a very lowshare price could be an excuse for reducing the number of shares incirculation. But a sharp dividend increase would surely work wondersfor any depressed shares.

Directors are fond of buy backs (often euphemistically describedas "returning cash to shareholders") because they favourablyinfluence earnings per share, the yardstick invariably used whensalaries and bonuses are set.

There is growing anger at the lavish way many executives arerewarding themselves these days. Inflated pay and perks, often inthe form of share options, cash bonuses, over-generous pay packetsand undeserved benefits, create considerable ill feeling, butquestionable remuneration packages are invariably approved, withmany City big guns meekly surrendering when it comes to the crunch.

Buy backs, like many other City exercises, ignore smallshareholders. They are not in a position to take advantage, unlessthey are exceedingly lucky enough to hit the stock market when abuying operation is underway. It is the institutions, much closer toCity events, that benefit.

Concludes Mr Smith: "Most share buy backs destroy value for theremaining shareholders."

There are a number of ways cash can be returned to allshareholders. Increasing the dividend is the most obvious method.Special cash payments, share consolidations and even loan notes areother routes.

I hope the intervention of Mr Smith adds weight to the oppositionto what is an unattractive activity, encouraged by commission-hungry corporate advisers.

He has enjoyed a colourful career. A former analyst, he co-authored a controversial book about dubious but legal companyaccounting; went on to develop the stockbroker Collins Stewart; andis chairman of the money broker Tullett Prebon.

He is now trying his hand as a fund manager, and has promisedthat his operation, called Fundsmith, is a low-cost fund that willgive the "fat and complacent" fund management industry a "bloodynose".

Although buy backs rankle, I remain deeply concerned about theunfair practice of private share placings when the chosen few areinvited to buy shares at a significant discount to the then rulingstock market price under the banner of injecting cash into acompany. I have attacked such an undesirable habit, which leave thevast majority of shareholders out in the cold, many times. I was,therefore, pleased that City of London Group, a former no pain, nogain portfolio constituent, opted to accompany a placing with anoffer to all shareholders.

At one time CoL was an internet, investment and public relationsgroup. It has changed its spots. The successful portfolio remains,but the company is developing in such areas as fund management,litigation funding and trade finance. All-told it is raising 7.5m.Most, 5.2m, has arrived via a placing but, at some expense, it hopesto pull in up to 2.3m via an open offer. Shares have been sold at83p against a ruling price of around 92p when the cash call wasannounced.

CoL shares have had a colourful existence since arriving on thestock market in 1996. At the height of the dot.com madness they hit950p. But like so many others, as sanity returned, they collapsed,at one time going below 40p.