It is the climate of the redemption of shares to pay dividends for Irish companies?

  • It is the climate of the redemption of shares to pay dividends for Irish companies?
    Independent.t. E.
    The three largest companies in Ireland spend up to €2.3 billion, to buy back their own shares. But such a buyback the best use of companies cash? Last week, was quoted by the bookmaker paddy Power Betfair, which in may announced £ 500m share buyback, has submitted its results for the first six months of the year.

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The three largest companies in Ireland spend up to €2.3 billion, to buy back their own shares. But such a buyback the best use of companies cash? Last week, was quoted by the bookmaker paddy Power Betfair, which in may announced £ 500m share buyback, has submitted its results for the first six months of the year.

FMS showed that he has already spent almost £200 million to buy back its own shares and that it will soon start buying second £300m tranche of shares.

Paddy power on Betfair is not only Irish-quoted companies that are buying back their own shares. In April, the CRB, a large Irish manufacturing company and the most valuable company on the Irish stock exchange, announced that it will spend €1 billion to buy back its shares over the next 12 months.

However, the king of the redemption of shares is a low-cost airline Ryanair, which spends €750 million program to repurchase shares. He has spent more than €4.2 billion buyback of its shares since 2007. He also paid another €1.5 billion on three special dividends and €398m on a special distribution totaling €6.15 billion rubles in the same period.

Irish companies not only to purchase its own shares.

Us-quoted companies have spent almost no reliable 5.1 trillion dollars (5,100 billion) to buy back its own shares over the past decade. Reductions trump tax have further stimulated the boom of redemption with Cisco ($25 billion), wells Fargo (22.6 billion USD). and Pepsi ($15 billion), being one of the major U.S. companies to announce share buybacks this year.

These redemptions are being lost among the recent buyback at $ 100 billion., announced tech giant Apple in may. This will allow to attract up to $ 300 billion the amount it spent on the repurchase of own shares since 2012.

Ransom and boom shows no signs of abating. U.S. companies announced a record $437bn of redemptions in the second quarter of 2018, beating the previous record of $242 billion, which was installed in the first quarter of 2018.

Something similar happens in the UK. Of the companies listed there have spent £15 billion to buy back its own shares during the year to January, only slightly less than the £17 billion that they raised from the issuance of new shares for the same period.

Oil giant BP is spending up to $1.6 billion per year buying back its shares, lloyds spends £1 billion on buyback of shares, Aviva is spending £500 million while “Royal Dutch shell” plans to spend up to $25 billion to repurchase its shares until 2020.

For companies, the main advantage of a share repurchase, by reducing the number of shares, earnings per share – and hopefully the stock price will rise.

This is good news for shareholders, including senior managers, as part of their compensation is often tied to the stock price.

Critics are less eager to purchase, with the economist newspaper once describing them “as a kind of corporate cocaine that induces a temporary feeling of invincibility but masks weakness and vacuity”.

In 449 of the companies that are constantly included in the S&P 500 leading American companies in the period between 2003 and 2012, has spent 2.4 $trillion, or 54pc of their earnings, mainly profit after tax, to repurchase its own shares for the period.

Dividends absorbed a further 37pc of their earnings, according to William Lazonick, Professor of Economics at the University of Massachusetts Lowell in September article in the Harvard business review 2014. American companies spent an average of $316bn more on share buybacks than they raised from the issue of new shares in the period between 2004 and 2013. “That left very little for investments in production capacity or improving the income of employees,” he wrote.

One company that came in for particular criticism from Lazonick was manufactured by pharmaceutical company Pfizer, which, he estimates spent the equivalent of 71pc of its profits to repurchase and 75pc dividend in the period from 2003 to 2012. In other words, Pfizer has spent on payments to shareholders than it earned and had to dip into their capital reserves to Fund these payments.

Overall, the top 10 share repurchasers spent $859bn, 68pc of their total profit after tax, to repurchase shares in the period from 2003 to 2012. During the same period only three of this top 10, Exxon Mobil, Procter & Gamble and IBM, has outperformed the s&P 500.

Based on first half figures, American companies are now the largest buyers of U.S. stocks. Regardless of whether or not one agrees with the opinion Lazonick for redemption, the empirical data clearly show that most companies are buying its shares You the time wrongly and end up buying at or close to the top of the market.

Yet few companies, especially British retailer of clothing then got their time of the redemption right, much more common is the experience of GE.

He spent $3.2 billion to repurchase its shares at an average price of $31.84 for the first three quarters of 2008-only to turn around in the last quarter and the issue of new shares at an average price of only $22.25 $12 billion capital raising, which tried and failed to save GE capital’s triple-a rating.

The behavior of American stock prices this year also little to alleviate these fears. After the burst 6PC in January, the S&P 500 index was basically flat over the past six months, despite a tsunami of redemption.

Irish companies buying back their own stocks, CRB entry on 13pc from its five-year high €29.00 recorded in may 2017, 40 PCs Ryanair from August 2017 peak of €18.60 while paddy power for the Betfair promotion 30pcs February 2016 peak £10.70.

These price falls to provide shareholders of these companies, at least some assurance that management is not overpaying for the shares. CRH sources say that the buyback of shares was triggered by a more stringent allocation of capital, which also saw the group dispose of its distribution Benelux business in 2017 and will likely lead to further Disposals in 2018.

The main reason paddy Power Betfair redemption was 2017 the company’s decision to abandon its traditional status of the original. BPP is now aiming at the shoulder of one times EBITDA (earnings before interest, depreciation and amortization).

Both companies firmly believe that the repurchase of shares will not entail a slowdown in absorption.

While share buybacks came to a lot of criticism, there is another, much more positive. “Firms that repurchase shares subsequently beat their peers by 12.1 PC for the next four years. And does not undermine long-term value of the company, the buyback to create value, ensuring that additional capital is not in vain,” – wrote Professor London business school Alex Edmans in September 2017 article in the Harvard business review.

Edmans argues that those who claim that the stock repurchase limit investment companies got things wrong: “this is the exhaustion of investment opportunities of the firm, which will lead to redemption, and not redemption causing a reduction of investment.”

Prior buybacks have become commonplace, dividends were the primary method by which companies have returned cash to its shareholders. Dividends remain an important channel refund. A big problem with dividends is their inflexibility. As any company that had to cut or reduce its dividend can testify, shareholders, this is very bad, and the stock price suffers accordingly.

“Repurchase offer firms the opportunity to vary how they return to their shareholders from year to year. Even if the company buys a lot of stock in the past year, he can buy the zero this year. Even after the announcement of the repurchase program this year, he may decide not to follow it with few negative consequences. While the company may change its policy of redemption, depending on its investment needs, it must maintain a historical level of dividends after the dividend reduction will lead to significant stock price will fall.

“This means that it is better to return excess capital in the form of redemption, as the increase in ordinary dividends implicitly commits the firm to maintain a high level of dividends in the future,” says Edmans.

The decision by three of the largest companies in Ireland to spend significant chunks of cash to buy back their own stock, the more likely others will follow. With their balance sheets awash with excess capital, the stock price going nowhere and profitable opportunities for lending are still hard to find will be aib and Bank of Ireland be tempted to go down the ransom road as soon as the regulators allow them to do so?

While the buyback is unlikely to disappear any time soon, what we are seeing now in the US and UK almost certainly represents a cyclical peak of activity. The British government established a redemption request, citing concerns that they may be “crowding out the allocation of surplus capital to productive investment”, while in the US Senator Elizabeth Warren, the likely democratic contender for the US presidential election in 2020, accused the companies of not investing in the future through the purchase of shares.

Current tax benefits of share buyback to investors, which are taxed as capital gains, not income, but may prove to be an irresistible target for future revenue-hungry governments on both sides of the Atlantic. At the same time, stand a lot more to repurchase shares.

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