Wednesday, July 11, 2007

Bigger Bang Better but Dividends better signal?

Bigger Bang - Investor Relations -
"When it comes to buying back shares, it pays to think big. Two recent reports — one from Morgan Stanley, the other from Citigroup — find that companies executing the biggest buybacks relative to market capitalisation see their shares rise more than the rest subsequently."
Which is interesting enough, but the real reason for inclusion are these two nuggets found late in the article. First:
"..there is an important geographical caveat. The share prices of British companies with the highest buyback yields have underperformed the market in the past three years, in contrast to their continental European peers with identical repurchasing characteristics. UK companies are traditionally perceived as "more shareholder focused than their European peers," Morgan Stanley's analysts note. So, when continental European firms embark on "what is perceived to be a value creating exercise...the potential upside is more significant."
and then secondly:
"Over the past ten years, the share prices of companies that consistently boost dividends have outperformed the market — including companies with buyback programmes — regardless of the relative size of the dividend or buyback. "Dividends are rightly perceived to be a much better indicator of management's long-term view of the health of their company..."

Three "take aways"
  1. Unlike some earlier research, this European-based study by two investment firms finds bigger buybacks are a better signal than small buybacks.
  2. The buybacks seem to be more important where governance is not as good.
  3. Buybacks have a positive effect, but dividends may be a better signal.

For more on buybacks, see some past articles.

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