Bountiful Buybacks are Beautiful

Companies that are disciplined in stock issuance and buybacks tend to outperform

Shore Capital 4 October, 2012 | 2:10PM
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This article is part of Morningstar's "Perspectives" series, which is a series of articles written by third-party contributors.

Warren Buffett's annual letter to shareholders of Berkshire Hathaway is brief and topical, and along with the annual report, well worth a read in our view. The gem from 2010 looks at ‘An Inconvenient Truth (Boardroom Overheating)’; an examination of the use of stock to execute mergers and acquisitions. It appears that Warren Buffett and his partner at Berkshire, Charlie Munger, treat the issue of stock issuance seriously. In their own words they say that they "enjoy issuing Berkshire stock about as much as.. ..prepping for a colonoscopy". Ouch.

Appreciating the sentiments, but made a little uncomfortable at the analogy, we at Shore Capital have reviewed the pattern of stock issuance of UK companies over the past decade. Over the long-run those companies that display the most discipline in stock issuance tend to outperform, as illustrated in Figure 1. The chart shows the performance of the basket of stocks that is updated quarterly to include those companies with the biggest stock buybacks as a percentage of shares in issue.

Over the 12 months to the beginning of October 2012, stocks with the largest percentage of shares bought back returned 20.1%, on an equal-weighted basis, against 15.6% from the FTSE 350 benchmark, in capital returns, and 14.1% from the FTSE Non-Financials. In Q3 2012, performance was 9.8% for the selected stocks, against the 3.8% return for the FTSE 350, and 2.8% for FTSE Non-Financials.

The 2012 Q4 selection is shown in Figure 3 below. The list shows the relative performance over one and three months of those stocks that have had the highest degree of share buybacks over the previous 12 months. It is noticeable that the past three months has seen a pickup in buyback activity from the likes of Morrison Supermarkets (MRW), British Sky Broadcasting (BSY), Johnson Matthey (JMAT), GlaxoSmithKline (GSK) and Sage Group (SGE).

The original version of this article was written by Gerard Lane, an analyst at Shore Capital.

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Shore Capital  is an independent investment group with a 25+ year track record, offering professional and personalised services to clients.