MARKET COMMENT
Buybacks Indicate Cheap FTSE

By Maynard Paton (TMFMayn)
October 6, 2004

Share buybacks are a substitute for dividend payments. Companies that buy back their shares are generating excess cash and, rather than distributing it all to their shareholders, choose to reduce today's shares in issue in order to magnify tomorrow's earnings and dividend improvements. Read more.

Last month, twenty FTSE 100 firms announced share buybacks, totalling over £1.3b. If repurchase programmes are maintained at this sort of level, the FTSE 100 (at a whisker over 4,700) would appear good value.

This table summarises the September buybacks:

With the yield on the blue-chip index at 3.2%, Britain's hundred largest firms currently pay approximately £36b to shareholders in dividends. Yet, from the September announcements, it's not hard to envisage the annualised amount spent on FTSE 100 buybacks to be anywhere up to £16b.

Add on, say, £13b, to the £36b of dividends, and investors can presently collect a 'dividend and buyback yield' of around 4.2%. Not bad, when gilts are offering around 4.8%.

Of course, buyback programmes can be stopped and started at will, and the shares repurchased last month may not be representative of the levels repurchased in the future. However, the top four companies in the list appear committed to their repurchase programmes, so their sizeable expenditure ought to support the inferred 1% 'buyback yield'.

Vodafone, for instance, paid £1.4b in dividends during the year to March 2004, yet has earmarked £3b for buybacks in its current financial year. In the first half of 2004, BP spent $3.2b buying its own shares, compared to dividends of $3.0b.

Meanwhile, AstraZeneca's interim results revealed a $494m dividend and a $968m buyback. And GSK reported a first-half dividend of £1.1b, to go with £486m spent on share repurchases.

Suffice to say, if so many companies are happy spending millions buying their own shares, it would make good sense to join them.

More: The Beauty Of Buybacks | Dividends v Gilts: FTSE 6,253?

Maynard owns shares in GlaxoSmithKline.