Jardine Lloyd Thompson is the latest in a line of insurers preparing a repurchase program to buy back shares. As the trend grows, James Dean looks at its effect on the market
Shareholders must think Christmas has come early as buyback announcement follows buyback announcement – putting them in line for super-dividends over the coming months.
Jardine Lloyd Thompson (JLT) this week announced plans to buy back £40m of shares by next June, following decisions by Amlin, Beazley and Kiln to launch identical schemes earlier this month, worth £120m, £30m and £60m respectively.
Brit and Hiscox made buyback announcements earlier in the year.
The fear of low premiums in 2008 is the driving force behind the multitude of share buyback schemes, as companies seek to redistribute their capital to cope with the continued downward pressure on rates.
But they should be wary of missing out on other opportunities before returning capital to shareholders, and private investors might be missing out, according to KBC Peel Hunt analyst Charles Coyne.
“Companies do this if they think rates are coming off – it is a question of reducing capital. But what I fear is that everyone jumps onto the same bandwagon when maybe they shouldn’t. Capital might be better off used elsewhere.
“Obviously, buybacks enhance earnings per share (EPS) but net tangible assets (NTA) decline.”
Coyne went on to question the benefit to private investors of buyback schemes. He said: “Repurchase programmes will benefit institutional investors, but return of capital via dividends is better for some. With share repurchase programmes, the private investor is left without a dividend.”
“Payouts dangle a proverbial carrot in front of the eyes of the market, enticing new shareholders to take a stake in the hope of cash to come.
In an effort to please investors, listed companies are funnelling spare cash into shareholders’ hands, usually via a special dividend. This spare cash may have arisen, for example, because fewer claims have been paid out by the company in a benign season, or because the company’s investment portfolio has performed above expectations.
Whatever the reasons, shareholders expect to cash in if they know there are spare funds available. Across the board in the UK, listed insurers will be expected to follow the example set so far.
Obviously, shareholders will be happy with any payouts. But payouts also dangle a proverbial carrot in front of the eyes of the market, enticing new shareholders to take a stake in the hope of cash to come next year.
Analysts at financial institutions will also take note of any payouts and change their EPS forecasts accordingly.
The development of the share price of each of the buyback companies should be something to watch over the next few weeks. Obviously, the market’s initial reaction will have an impact. But because the buyback will result in fewer shares being available, prices should generally increase – bringing even further rewards to investors should they sell up.
An offshoot of this is that the company will suffer a decline in profits, because it will not earn interest on the surplus it releases. However, the share price rise should counteract the fall in profits.
And looking even further forward, what will be the reaction of investors if any of these companies decide to backtrack, and – heaven forbid – release shares in an effort to raise capital?
The balance between pleasing investors and planning for the future must be carefully struck.
