Cenovus share repurchases

Popular with investors, destructive to their returns

In 2022, Cenovus (CVE.TO) repurchased enough shares to reduce the company’s

share count to 1,909,190 shares from 2,001,211 shares, a reduction of 92,021 shares.

Cenovus spent $2,530,000,000 to reduce its share count, or $27.49 per share reduced. Sure they bought back 112,489 shares but in tandem issued 20,468 shares for nominal amounts, negating the value of some buybacks. Here is a clip from Cenovus cash flow statement.

Today, the shares trade at CAD$22.00.

Had Cenovus paid that $2.53 billion as dividends, each shareholder would have received another ~$1.26 in dividends. As it stands, shareholders saw their investment decline $2.69 per share over the past year and didn’t get the $1.26 paid out to those who were no longer shareholders. The buybacks are a bet that future earnings and cash flow per share will be materially higher. We know how much higher regardless of actual performance since whatever net income and cash flow are reported, they will be increased over a “no buyback” policy by no more than (2,001,211/1,909,150) - 1 = 4.8%.

A shareholder owning 1,000 shares who received additional dividends of $1.26 per share may have chosen to buy more stock available today at $22 per share and bought $1,260/22 = 57 more shares, increasing their holding by 5.7%.

I do my best to remember grade three arithmetic and am confident that 5.7% is higher than 4.8%. No matter how you cut it, Cenovus’ decision to buy back stock rather than pay higher dividends in 2022 resulted in a worse outcome for shareholders not just now but for perpetuity since 2022 is over, the share price has fallen to $22 and the opportunity to buy 57 shares for $1,260 has come is present. Even if CVE.TO is grossly undervalued the 2022 decision cannot be repealed and has harmed, not helped shareholders.

Commodity prices are volatile and buybacks are as likely to produce inferior results as improved outcomes, even when the particular name is admittedly “undervalued”. I prefer dividends since to benefit from a buyback, I have to sell the stock since I am betting the buyback will increase the price of the shares. I will have to pay taxes on the sale and then find another name with a future at least as robust as the one I sold to come out ahead, a challenging task if markets are efficient.

Long run, Cenovus stock should deliver robust returns to shareholders. But those returns cannot be higher than the returns the same shareholders would have received if they had received an additional $1.26 per share in dividends in 2022 and used those funds to add CVE shares this year at $22.00. If the dividend is paid, that part of the return is a certainty. If the same money is used for a buyback, that part of the expected benefit carries risk. Proponents of buybacks need to “risk adjust” their analysis before becoming evangelical about the claimed benefits. Sometimes they work, sometimes they don’t.

Cenovus Q1 net income was $1 billion lower in 2023 than in 2022. Betting on improved results based on a prediction that commodity prices will remain firm is a risky gamble. The Q1 2023 results demonstrate just how risky.

I like the company and think the stock is good value at $22.00. I hope the company becomes a long term source of dividend income for me and stops betting my money on management’s views of value or future commodity prices. I am capable of making my own investment decisions, doing my own valuation of business enterprises, and don’t think oil & gas executives have significantly better skills than my own in finance or valuation.