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Looking for FTSE 100 income? Do these big share buybacks show the way?

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CRH (LSE: CRH) is in the building materials business, and Anglo American (LSE: AAL) is a miner with a wide spectrum of earthly products. But other than the fact that they’re both constituents of the FTSE 100, what else do they have in common?

They’re both engaged in share buybacks, which I’ve always been a bit wary of. It’s a roundabout way to return surplus capital to shareholders. The idea is than when shares are repurchased and cancelled, future earnings and dividends are spread over fewer shares, so EPS and the dividend should be higher — and that in turn should drive the share price up.

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Why not just pay out special dividends? There may be tax benefits, but there’s also the idea that buying up shares when they’re undervalued should provide better long-term benefits — but I’ve seen so many misplaced buybacks that I’m not entirely convinced.

New phase

Dublin-based CRH has just “completed the latest phase of its share buyback programme, returning a further €240 million of cash to shareholders,” having repurchased 7.6m shares since 26 August 2019. On Tuesday it announced a new phase, with the intention of spending a further €200m on more of its own shares.

That seems like a statement of confidence in the value of the stock, but the decision seems perhaps questionable to me as the shares are flying high right now. The price is up 43% over the past 12 months, resulting in a P/E based on 2019 expectations of a little over 16. That’s doesn’t look significantly overvalued by any means, and there may well be more growth to come. But for a company in a relatively mundane business paying dividends yielding around 2% to 2.5%, it doesn’t look like obvious undervaluation to me.

My feeling is that companies like CRH with surplus cash should almost always use special dividends to return it to shareholders, and let them decide for themselves whether they think the shares are cheap enough to buy more. I think companies themselves should focus on running the business, and almost always pretty much ignore the shares.

Ongoing phase

Anglo American snapped up 283,960 shares on 6 January at an average price of £21.44 apiece, in its plan to return up to $1bn that started in July 2019 and is set to extend to “no later than 31 March 2020“.

Again, we’re looking at a share price that has done well in the past year. That can be partly due to the share buyback itself, so it’s not necessarily an indicator that the buyback plan was a poor idea. But Anglo American shares were soaring before the buyback commenced, and initially slumped after the announcement — and they’re still below the pre-buyback price.

I see signs that trouble me a little over the Anglo buyback programme. We have a P/E of 10 and a dividend yield of 4%, and that looks good value compared to the FTSE 100 average. But the mining business is characteristically cyclical, and two years of forecast 10% EPS falls would push that ratio up to nearly 12 — so maybe the shares aren’t such good value now.

The Anglo share price has nine-bagged since the depths of the firm’s troubles in January 2016, so it would be ironic if the share buyback ends up tracing the share price’s cyclical peak.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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