Saturday, 25 October 2014

Share Buybacks vs Insider Buying

Good article in The New York Times: "Stock Buybacks Demystified".

Some snippets:

Corporate insiders have impeccable timing when buying stock for their own accounts. When the ratio of insider buying to selling is higher than normal at many companies at the same time, it tends to be near a market low.

That was the case in late 2008 and early 2009, toward the end of the last bear market. The ratio was at historically high levels for months, just before stocks tripled, according to Vickers Weekly Insider, a service that tracks such trading.

But when bosses authorize buybacks — buying stock on behalf of their companies, not themselves — they show nothing like the same foresight. The $617 billion that companies in the Standard & Poor’s 500-stock index spent on buybacks in the 12 months through January 2008 was the highest amount in the nine years for which the research firm FactSet has compiled such data.

That was just in time for the worst market decline since the 1930s. The following year, a more auspicious time to accumulate stocks, buybacks totaled $353 billion.

“Insiders, when buying for themselves, are not looking at the present; they’re looking at the future. Buybacks are done for the present; cash flow is high, so they use it for buybacks. That drives them in good times and bad.”

Buybacks tend to be done late in an uptrend because that’s when there are fewer attractive alternatives for spending money and the greatest need to lift earnings. But that’s also when stock valuations are high. If companies borrow to accomplish their buybacks, as many do, it leaves them even worse off when the cycle turns down because they have more debt on their books, he added.

I have never been much of a fan of share buyback programs. I have seen enough cases in which these programs were abused, for instance :
  • A share price was "defended" at some artificial price level. When the money for the share buyback program ran out the share price crashed, not unexpectedly. The company should have let the share price go down, enabling it to buy more shares at a cheaper price, for the advantage of all remaining shareholders.
  • An aggressive share buyback program exactly at the moment that insiders are selling the share. There is the perception that the share price is artificially supported, enabling insiders to receive a higher price than they otherwise would have.

Share buybacks have been invented in the US, having had a double taxation on dividends.

Asian countries don't have this double taxation, so they can freely distribute excess cash in the form of dividends. There is here actually not much need for share buybacks (with this being a possible exception).

I prefer dividends over share buybacks:
  • Dividends are much more transparent, an overview of the dividends paid out in (say) the last ten years is quite insightful in evaluating a company.
  • Share buybacks are distracting, both for the management which has to execute it (dealing on a daily basis with price and volume), and for the shareholders who have to evaluate it in combination with the dividends.

Friday, 24 October 2014

Tomypak: CG issues

I wrote several times about Kuala Lumpur based fund manager Claire Barnes and the Apollo Fund which she manages.

In the latest quarterly report "FX headwinds & unheeded duties of care" corporate governance issues regarding Tomypak Holdings are described:

"A particular irritation has been the collapse of corporate governance at Tomypak Holdings, a Malaysian manufacturer of flexible packaging."

For a more detailed description I refer to the above link.

Of further interest is:

"We [the Apollo Fund] therefore expect the Securities Commission to require a General Offer, albeit at the low price of RM1.30."

Any readers with an interest in this company are invited to contact Claire Barnes.

The 5-year graph of Tomypak's share price:

The Apollo Fund is not the only fund which writes about corporate governance issues in their investment holdings. Singapore based Lighthouse Advisors for instance publishes public newsletters on their website with comments related to listed companies. Hopefully more funds will follow suit.

Wednesday, 22 October 2014

Australia 'paradise' for white-collar criminals

I wrote several times in a negative way about the Australian financial industry, and the lack of enforcement: here, here, here and here.

I have insights in a few (rather dodgy, to put it mildly) companies listed on the Australian exchange, and am indeed shocked, I think that most of those companies would not have been allowed to list on Bursa Malaysia. Next to that, the financial statements of the smaller listed companies compare very badly to the statements of ACE listed companies.

It seems that the chairman of the ASIC (Australia's Securities Commission) seems to agree on that, according to this article on Sydney Morning Herald's website.

Some snippets:

Australia is a "paradise" for white-collar criminals because of its soft punishment of corporate offences, the Australian Securities and Investments Commission chairman, Greg Medcraft, says.

Mr Medcraft said the only realistic response was harsher jail terms and bigger penalties for white-collar crime.

He also repeated calls for a national competency exam for financial advisers in the lead up to a crackdown on the industry and more funding for ASIC to investigate the finance sector, including a user-pays funding model.

Finance industry players were not "Christian soldiers", Mr Medcraft said on Tuesday, but were motivated by fear and greed.

"You have to lift the fear and suppress the greed," he said.

"This is a bit of a paradise, Australia, for white collar.

"The thing that scares white-collar criminals is going to jail and that's what scares them everywhere in the world."

"The penalties, particularly civil penalties, in Australia for white-collar offences are basically not strong enough, not tough enough. All you're doing is giving them a slap on the wrist [and] that is not deterring people."

In the past few years ASIC has come under fire over its handling of scandals at the financial planning arms of the Commonwealth Bank, Macquarie Group, and Storm Financial.

At recent Senate and parliamentary committee inquiries the corporate regulator was accused of being too slow to act against dodgy financial planners, of lacking transparency and being too trusting of big business.

Mr Medcraft admitted ASIC had made mistakes, but said its capacity to investigate and pursue corrupt financial advisers had been curtailed by a lack of resources.

He vowed to be more transparent about ASIC's enforcement actions and said the regulator would "not be captive to the big end of town".

"If we want to react faster, then having more resources to be able to do it is important," he said.

The Australian Securities and Investments Commission plans to devote more resources to scrutinising and investigating the financial advisory industry while also forcing the sector to lift its game through better education, monitoring and reporting of breaches.

EPF not allowed to vote in RPT

Bursa has made its final decision, EPF is not allowed to vote in the CIMB-RHB Capital-MBSB deal. The reasons behind this can be found here:

EPF’s position is not the same as the other shareholders of RHB Capital premised on the

(a) EPF’s controlling stakes in RHB Capital (41.5%) and MBSB (64.5%) place it in a position of significant influence in these companies;

(b) as the single largest shareholder of RHB Capital and MBSB and a major shareholder in CIMB Group, EPF may benefit from the transaction as a shareholder of MBSB and/or CIMB Group. As such, its overall position would differ from a party who is merely a shareholder of RHB Capital, especially given the differing terms and valuations applicable to the 3 affected companies; and

(c) EPF has prior knowledge of the Proposed Merger as it was notified by CIMB

I think that this decision is spot-on. I think that EPF should be able to block the whole deal if it thinks it is in their disadvantage.

But given that the EPF does indeed support the deal, it should not be able to push the deal through by being allowed to vote. This is after all a Related Party Transaction (RPT), and it is one of the Corporate Governance areas of great worry in Malaysia.

EPF has different percentages in each of the three companies, which means that it has a clear preference in the outcome: a relatively higher valuation for the company it has a large stake in, and vice versa.

If subsequently the minority investors shoot the proposal down, then may be it isn't that great anyhow.

Many corporate restructure exercises do disappoint, the outcome being less good than forecasted by the dealmakers who made the shiny PowerPoint presentations, showing all the synergy.

In reality, things are not that easy, cultural clashes of the employees of the different companies are quite common and economies of scale do not always work as expected.

To all Hindu readers: Happy Deepavali!