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Next share buybacks
Dan Tebbutt - A Shareworld Contributor
Over the last few days I've noticed Next have resumed buying back their own shares. This has been a habit of theirs for many years now. Rather than waste their cash on ego-boosting acquisitions, they have diligently reduced the share capital of the company, thereby enhancing earnings per share. Over the last 3 years they have repurchased over 14% of their share capital, and over 10 years the figure is over 40%.Over the last 3 years Next's share have ranged from 2300p right down to 850p. Next have been buying back shares throughout this period. So how's their timing been? Do they buy shares when they are cheap or expensive?
Over the period they purchased 32m shares at an average price of 1890p*. That's 205,000 shares per week. If they'd simply bought that number every Friday, they would have paid an average of 1580p. Over the 3 years they spent £605m buying back shares. That's £3.9m every week, and if they'd spent that every Friday they would have bought 42m shares at an average of 1440p.
That suggests Next really aren't too hot at timing their share buybacks. They bought a lot of shares at around £20, but were less keen at around £10 – presumably more keen to hoard cash in uncertain economic times.
At least they didn't compound their error by issuing new shares while they were languishing at £10. That sort of “buy high, sell low” behaviour is a classic mistake made by novice investors, and company directors don't seem immune. Just this week Warren Buffet warned Kraft against doing so in their pursuit of Cadbury's (http://www.berkshirehathaway.com/news/JAN0510.pdf). In 2007 Kraft bought over 100m of their own shares at a price of $33, and this year are proposing issuing up to 370m at a price of $27 to fund their bid. Buffet rightly points out that this is not a smart way to carry on.
On the whole I'm not too surprised that companies tend to buy and sell their shares at the wrong time. When the economic outlook is tough, share prices fall, and companies want to preserve cash in anticipation of bad times ahead. By the time they are feeling flush again and have cash to spend, share prices have already bounced back. Their buybacks are driven by the same sentiment that drives the stockmarket, so it's hardly surprising that their timing ends up looking pretty shabby.
The fact that Next slowed down their buybacks in 2008 and 2009 has actually been beneficial to me. It took a significant buyer out of the market, and that lack of demand will have caused some of the share price weakness. That meant that I was able to pick up my shares in late 2008 and early 2009 at an average of 1142p – by no means the bottom of the market, but with hindsight clearly a good move. Next currently form about 7% of my portfolio.
*This information wasn't particularly easy to find. To obtain it I downloaded all their RNS reports titled “Transaction in own Shares” (over 250 of them spread over 3 years) and parsed them to pick out the number of shares bought and the price paid. Luckily Next used a limited number of formats for their RNS announcements, so the parsing wasn't too arduous. For the few I couldn't parse automatically, I just pulled the numbers by hand.