Baker Street, London -- The Bank of England decided that interest rates should go up today. They went up 0.25% to 5.5%. The leading mortgage providers have entered the navel-gazing stage, saying their rates are under review. The interest return on gilts, ranging from maturities of 2 years to 30 years have actually fallen by 0.1% to 0.17%. So perhaps mortgage rates should actually fall! The European Central Bank also decided on a rise. Their rates rose 0.5% to 3%.
The stock market seemed pleased with the Bank of England's decision on the basis that any inflationary pressure will be nipped in the bud and that there would be less need for further interest rate rises in the near future.
The Personal Investment Authority ombudsman is hinting that people with endowment mortgages who were not warned that the policy may not pay off their mortgage may be entitled to compensation. This follows recent revelations that half a million people with endowment policies may discover that the plans are not sufficient to pay off their debts in full.
Once again the Conquerors section is dominated by the Technology sector. Perhaps that is fitting on the first day of trading for the London Stock Exchange's techMARK. Despite a derisive cry of "but they only play silly games" from TMFEagle, Eidos(LSE: EID) still managed to climb 450p or 10.6% to 4700p today. The company that created the Tomb Raider series is now valued at over £900m. Other big winners in the technology sector were ARM Holdings(LSE: ARM), up 123.5p or 6.2% to 2103p, taking its market value to the £4b mark. Barring a sudden slip, it should be a member of the FTSE 100 after next month's review.
Another FTSE 100 candidate, Logica(LSE: LOG) also posted a strong gain of 85p or 8.9% to 1035.5p after yesterday's statement at its Annual General Meeting. Whilst many similar companies are reporting Y2K slowdowns, Logica says that strong demand from telecoms companies is offsetting declines from financial clients. Did you know that Logica's chairman is called Frank? Sounds very down to earth for such a whizz-bang tech wonder stock.
Computacenter(LSE: CCC) was another good performer, chipping in with a gain of 59p or 8.5% to 750.5p. Yesterday the group announced the launch of Biomni, a business-to-business e-commerce solution, which is a joint venture with Computasoft e-commerce. The group said Biomni may be demerged at a later stage.
Misys(LSE: MSY) also had a good day climbing 46p or 8.5% to 589p. This afternoon it held a seminar detailing its strategies for its retail financial services and Internet personal financial services portal businesses. TMFGoogly was a guest of honour (well, perhaps that's a slight exaggeration). But no doubt he'll be bringing you his thoughts on the presentation in an upcoming edition of the Qualiport.
Tarmac(LSE: TARM) has resumed talks with Anglo American(LSE: ALL). The company said discussions were taking place regarding a recommended cash offer of 585p. Shares in Tarmac rose 67p or 13.8% to 554p. Two other companies said they were in discussions as well. Sanderson Group(LSE: SDE) said it had received an offer approach not substantially above 220p. Their shares rose 21.5p or 11.3% to 211.5p. And Cantab Pharmaceuticals(LSE: CTB) said they were in merger talks with "a number of companies". Their shares added 20.5p or 16.2% to 147p.
Shell's (LSE: SHEL) third quarter results disappointed the market today as they came in at the bottom end of expectations. The shares dropped 15.5p or 3.3% to 449p. There was also slight market grumpiness about the lack of further details about the group's cost cutting proposals.
Telewest(LSE: TWT) paused for breath after its recent gains and fell 13.5p or 4.7% to 276.5p. Merger rumours persist regarding NTL(NASDAQ: NTLI). The group will have the opportunity to present some cold hard facts this time next week when it publishes its results for the third quarter.
BSkyB(LSE: BSY) lost 23.5p or 3.7% to 620p on concerns that it may be coming to the market to raise money for expansion. The company has also officially denied that it has made a £1b bid for the rights to screen Premiership football.
Whilst we are on the pitch, football stocks were marked lower as the Financial Times highlighted their recent poor performance as a sector. The biggest loser was the Toon army as Newcastle United (LSE: NCU) fell 4.5p or 6.3% to 66.5p. Manchester United(LSE: MNU) dropped 5p or 2.4% to 203p despite the fact they have been confirmed as top seed for the next stage of the Champions League.
Chippenham, Wiltshire -- A small news article caught my eye this morning. It said that the Woolwich (LSE: WWH)had bought 100,000 of their own shares for cancellation at a price of 352.75p per share, and thus investment of £352,750. This got me interested and I decided to have a look back at recent months. Since the beginning of August the Woolwich has bought back 9,975,000 shares at a total cost of £33,078,350. Now that is a lot of money for them to spend in just 3 months, but it is a continuation of a policy that they have been following since August 1998.
Why do companies buy back their own shares? Well we would hope that the aim of buy-backs is to enhance shareholder value. Sometimes they can be used as a tax efficient alternative to increasing the dividend payment. A company may decide to buy back its shares as a way of returning surplus cash to shareholders as an alternative to a higher dividend payment, or instead of investing the surplus cash in existing or new operations. However, companies repurchase their own shares for many reasons, but generally they hope and expect that buying back their own shares will lead to an improvement in the share price.
We would all hope that the buyback is not being done simply to give a short-term boost to the shares. Shareholders have a right to expect that this manoeuvre is done for rational reasons. It should be done because the company believes that the best way to increase shareholder value is through the buy back of their shares. The direct impact of a share buy back programme is that, provided earnings remain constant, the reduced number of shares will result in higher earnings per share. And in theory this should result in a higher share price.
In the UK a share repurchase involves the company buying the shares and then immediately cancelling them. In the US, shares that are repurchased by companies are taken out of circulation, but remain in issue. These are then described as corporate treasury stock: these special shares can be sold back into the market in the future without the company having to resort to a rights issue ot raise funds.
However, the impact of a buy-back has the same effect in the UK as in the US, which is to reduce the number of shares in circulation. As well as increasing the earnings per share of each remaining share, the demand and supply balance for the shares is also affected. While the demand for the shares is increased (as the company is buying) the supply is being reduced as those same shares are bought and cancelled. This again can lead to an increase in the share price, but this effect is likely to be short term.
In general the market interprets share buy backs as being a positive signal by the company. It can give shareholders a choice on whether they want to receive cash from the pay-out by selling their shares in the market, and this can be more tax efficient to them than receiving a higher dividend
A word of warning though, many companies announce that it is their intention to implement a buy back strategy, and this may lead to an immediate rise in the share price. But there is a big difference between announcing a buyback and actually buying back the shares. Some companies (shock horror) may simply use the announcement of the buy back as a way of increasing the share price in the short term, but then don't actually go through with the plan. In the end if said company doesn't proceed with the buy back then the shares will fall back to their 'natural' level.
The repurchase of its own shares may also have a negative impact on the share price as the market may think that the company has fewer growth opportunities after the share buy-back, as its cash resources will have been reduced. It may also signal that the management has a lack of ideas about what they can do with the money to generate a better return for their shareholders.
Do you really want to invest money into a management that is lacking in good ideas? As we have said, the announcement of a plan for the repurchase of a large number of shares has the effect of driving up the share price over the short term. But also remember this could result in the company paying too high a price for their shares, which would then be to the detriment of the remaining shareholders.
If a company in which you are a shareholder is contemplating a share buy back it is worth asking a number of questions about this to see if you consider the move to be in your long term benefit. If the company has a lot of surplus cash, and is paying a very high relative dividend yield it may well make a lot of sense.
Why have cash sitting in the company's bank account attracting a poor level of interest when it could be in the banks of shareholders and available for them to spend or invest as they wish? For example if a company is paying a dividend of say 7% and they have cash on deposit earning 5% then it is obvious that if they buy back the shares they will have to pay less total dividend, and the money has been spent sensibly.
If a company has a low debt to equity ratio it may be that buying back the shares will increase its gearing levels. This will make their use of shareholders' funds more efficient. If they have a low requirement for capital expenditure then why hold onto the cash? Of course increasing debt may increase the risk associated with the business.
Are share buy backs always a good thing? Well there is no correct answer to that question. It depends on many factors, and each case needs to be considered individually. But if nothing else it certainly is an indication of a company with a management lacking in better ideas.
We all know about 'Foolishness'. But what about being 'Motley'. Co-founder of the US Motley Fool, David Gardner, considers this very question in his Rule Breaker report which is well worth a read. But make sure you come back to the UK site!
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