Evil Diaries: Don’t Say Goodbye To Good Buy Backs

In a recent edition of the Investors Chronicle Gervais Williams of Premier Miton declares that he always finds buybacks disappointing. I am not sure why. Certainly, for many years they were illegal in the UK and the problem could not arise. But it seems impossible to argue that it is always disappointing.

I suspect that quite often directors authorise buybacks since they have an opinion as to future performance ahead of that of the market. Whereas they may be wrong. Banning buybacks gets round this problem and stops directors being tempted to buy back to improve the value of their call options.

However, I well recall, some thirty years ago, the controlling shareholder and CEO of a prominent British coal mining company buying back roughly £30m worth of stock. This gulled more than a few into believing the stock was worth buying. A few days later it emerged that the seller of the £30m of stock was the aforesaid CEO. The company went bust not long afterwards. This conduct seemed, and still seems to me, light-fingered. Nothing was done about this affair.

Elsewhere, it is possible, cash solvency permitting, for a company to buy back stock where the inescapable effect is to improve the lot of the remaining shareholders. The current example at the forefront of my mind is LDG (to which I have frequently and recently alluded ad nauseam) and there are many others. In these circumstances it is not possible for Premier Miton to be disappointed.