Home Retail Group: Poor timing of buy-back
The plan by Home Retail Group (LON:HOME) – the Argos and Homebase retailer – to buy-in £150m of its own shares would have been better timed 18 months ago when they would have cost half the current price. Companies have an appalling record of mis-timing buy-backs but expect to see many more of them this year.
The corporate sector spent 2009 issuing equity through rights issues at heavy discounts to already low market prices. In 2010 they will buy back those shares at inflated prices.
BAE Systems has announced a £500m buy-back programme, now Home Retail is following. As the corporate sector is cash-rich, using the rights proceeds to repay debt leaving about £100bn in its bank accounts, it can afford a big spree.
Business ought to be using its cash to invest in the future but with the economic outlook uncertain – or worse still, only too certain – it is keeping the chequebook closed. Capital investment is lower than at any time for 40 years, having fallen 30 per cent from pre-crash levels.
Buy-backs were popular before the crash as companies borrowed to gear up balance sheets and concentrate earnings onto a smaller equity base. Most big companies did it. But spending money on your own shares can be interpreted as having run out of ideas on anything else to spend it on.
Home Retail’s £150m is more than it will spend on upgrading its stores and other investment this year. It absorbs half the profit – with ordinary dividends of £126m taking most of the other half – at a group were margins are falling and like-for-like sales are expected to contract this year.
The main motivation for the buy-back seems to be the threat of takeover from Wal-Mart or a private-equity group. Yet the immediate effect was not to push up the share price to make Home Retail more expensive and the buy-back will reduce the share base making the company cheaper still.
Buy-backs are unfair to small investors who don’t get a look in. Those shareholders would rather their annual dividend had been raised. But even institutions would surely hope that it anyone is going to buy the company’s shares at a price boosted by bid hopes it should be a bidder rather than the board trying to frustrate any takeover attempt.
