Royal Bank has caught the "buyback" disease
Plans to buy back 30 million shares squander capital and divide shareholders
Note: All data in Canadian funds
Royal Bank of Canada (RY.TO) announced a normal course issuer bid (NCIB) to buy back 30 million shares over the course of the next year through the facilities of the Toronto Stock Exchange. With Royal Bank stock trading at about $145 per share, the buyback will cost the company $4.4 billion. Not every Royal Bank shareholders will get any of that money, only the ones who choose to sell their shares into the NCIB.
As at year end October 31, 2023, Royal Bank had equity of $103 billion and 1,400,511,000 shares issued and outstanding. In the first two quarters of its fiscal 2024, the bank issued shares and the share count as at the date of the NCIB announcement is 1,415,074,558 according to the press release, so that about half the shares to be repurchased will simply bring the share count back to last year’s level.
In the first two quarters of fiscal 2024, Royal issued 12,478,000 shares of which 628,000 comprised share based compensation of executives and 11,850,000 in connection with the dividend reinvestment program (DRIP).
In a nutshell (which is an appropriate metaphor) Royal just issued 12.5 million shares for an average price of $122.81 and now plans to buy those shares back for an average price likely to be $145 a share if not more.
What bright lights on the Royal Bank board think this is a good idea? I have no doubt Royal Bank shareholders will continue to particpate in the DRIP and by the end of the NCIB the total share count will be not materially different from October 31, 2023.
All that Royal Bank will have accomplished through this circular nonsense is to throw about $30 to $50 million into the trash can. I guess when you are as large as Royal Bank, a few million dollars wasted is a rounding error
A serious board of directors might have approached this differently - paid their executive cash bonuses rather than stock based compensation and paid their shareholders dividends that all shareholders received rather than buying shares from some and not others. There might also be additional savings in that the independent auditors would waste less time valuing stock options using Black-Scholes and verifying the share counts every quarter.
Is Royal Bank where common sense goes to die?
Interesting. Share buybacks appear to have become a bit of a mantra these past few years. An easy way to gain shareholder support under the veneer of being in the universal interest of shareholders. I’ve argued most fall short of making a significant difference in share count as they are not long enough in time (years are needed) or deep enough in terms of percentage of outstanding shares purchased. Most are merely a replacement of shares issued under SBC plans. Some even add insult to injury by doing it with borrowed money.
More on buybacks from a recent Morgan Stanley research pointing to a problem with buybacks in companies that concurrently award large employee compensation in stock. https://marketwatch.cmail19.com/t/j-e-gjkiiid-iuydtklujr-r/