Do 2022-2023 buyback data point to success or failure of the buyback strategy?
You be the judge since the jury is still out and won't enter a verdict for several years
Scotia iTrade published a summary of the 2022-2023 buybacks for a number of Canadian E&P’s, duplicated below
Imperial oil (IMO) spent CDN$10 billion to buyback 22% of its outstanding shares and now has a market capitalization of CDN$40 billion based on 78% of its pre-buyback share count. IMO’s market capitalization absent the buybacks presumably would be CDN$40 divided by .78 = CDN$51.3 billion so the buybacks improved the outcome by CDN$11.3 - CDN$9.99 = CDN$1.3 billion, an implied return of 1.3/40 = 3.25% over two years from the buybacks alone. Had IMO paid out the same funds as dividends, shareholders would have received $9.99/$51.3 = 19.5 percent over two years but future returns would be lower since there would remain more shares outstanding and the company’s operating results would be unchanged by the adjustments to its capital structure. At this point, it looks like a failure but the jury is still out on future returns.
MEG Energy (MEG) spent CDN$731 million to reduce its share count by 12% and does not pay a dividend. MEG has a market capitalization of CDN$6.8 billion today and absent buybacks that value would be $6.8/.88 = $7.7 billion, an implied return of $900 million for expenditure of $731 million for a gain of $169/7,700 = 2.2% over two years. Had the $731 million been paid out as dividends, shareholders would have received .731/7.7 = 9.4% over 2 years. Again, the benefit of the buyback has to be in future cash flows being greater on a per share basis. The jury is still out on the benefit of the buyback strategy but so far it looks wan.
Whitecap (WCP) spent CDN$341 million to reduce its share count by 6% and today has a market capitalization of CDN$5.5 billion, which one would expect would be 5.5/.94 = 5.85 absent any buybacks. The $341 million outlay increased market capitalization by an implied $385 million, a gain of $44 million. Again, the returns are modest in the short term and the jury is still out as to whether shareholders are better off than had the same funds been paid out as dividends.
The total of approximately CDN$34 billion paid out to buyback shares has reduced the share count of those using buybacks to “return money to shareholders” by about 12%. Future cash flows are unaffected by the buybacks since they are being compared to an equal expenditure of funds to pay dividends. Future share metrics should show a 12% improvement in cash flow or net income per share over a dividend model. The question is whether shareholders of these companies (i.e. those who did not sell into the buyback programs) are better off than had the money been used to pay $34 billion billion in dividends.
Most of the putative dividend recipients are likely to have been taxable entities and the $34 billion would have been reduced by about $6.4 billion in taxes (assumes Canadian recipients entitled to the dividend tax credit and an effective tax rate on dividends of 14.7% which in turn assumes each shareholder receives $200,000 in dividend income and has no other sources of income), whereas the Liberal governments tax on buybacks at 2% is only $680 million. If one assumes the buyback strategy results in higher share prices the non-selling shareholders would have more than $34 billion in capital gains soone or later, of which $17 billion would be taxed at an average 40% rate so the tax drag on buybacks, albeit deferred until realized, would be $6.8 billion at the time of sale and $680 million paid by the companies at the time of the buybacks or a total of $7.5 billion, about 17% more than the tax drag from dividends.
The three examples above demonstrate that “buybacks” do improve share values but at least in the short term do not do so by enough to offset the alternative dividend income an investor would otherwise have received, and the bet is that over a longer period investors relying on buybacks will be better off. Given the volatility in commodity prices, that seems like a bad bet to me.