Actuarial news and views from Cape Town and beyond

Leave a comment

Capital Management can be a trap for boards

This article talks about using buybacks (repurchase of the company’s own shares) in order to boost company returns.  Around February this year, three companies (Qantas, Caltex, Seven Group Holdings) announced buybacks of $500 million, $270 million and $80 million respectively.  The author points out that buybacks are dangerous, since they are often pro-cyclical.  This means companies use cash generated in peaks of the cycle to repurchase shares when they are expensive.  Often, these shares end up being written down at the bottom of the cycle.  Rio Tinto and BHP Billiton are recent examples of companies which encounter problems in such acquisitions.

The author goes on to quote more examples of buybacks he suspects in future.

Clearly, some companies are falling into this trap and buybacks are happening without too much foresight going into it.  Using debt to fund buybacks should be done with extreme caution, as liquidity problems (among others) can easily arise if unfavourable scenarios play out.

The full article can be read here