x Abu Dhabi, UAEThursday 27 July 2017

Buyback is merciful news for News Corp shareholders

View from Here At this point, Rupert Murdoch's investors are likely to welcome a stock buyback.

Given all the fuss about Rupert Murdoch's media empire, it's not surprising that News Corporation's share buyback has barely made headlines. But spending US$5 billion (Dh18.3bn) of the company's money, on the company's shares, is probably the kindest thing Mr Murdoch can do for his investors at this point.

News Corp had already announced a while back that it would purchase $1.8bn of its own shares, but as it became clear recently that its plan to buy out BskyB were sunk, the media company said it would increase the buyback to $5bn.

Share buybacks are a traditional tactic companies use when they are sitting on cash, but not inclined to give it back to investors in the form of dividends. Shareholders are not always happy about this - if Mr Murdoch has five billion benjamins to dispose of, why not reward the people who have placed their trust, and money, in the company?

The more suspicious-minded also point out that share buybacks help to underpin a company's stock price. This has implications in the amount of interest it pays for loans. But as a result, it also underpins the value of stock options, which senior management usually take as part of their pay package.

We can safely assume that Mr Murdoch does not lie awake worrying about what his shareholders think of him. I don't suppose he anxiously checks his "friends" list to see how many people like him today.

But a share buyback is probably the nicest thing a company can do for shareholders, outside of sending them all a fruit basket for the holidays. Although dividends might be the routine way to reward shareholders, they do have drawbacks.

Both the US and UK levy a tax on dividends, but not on the profit from selling shares. A special dividend payout would have had to be shared with the government. It would, therefore, have been an expensive way to apply the excess capital News Corp is sitting on.

Dividends present companies with another problem: they can become addictive to investors. Pension funds especially like them, despite their tax implications, because of the guaranteed income they provide. As a result, they give preference to companies that have a good history of paying dividends. Many investment managers would rather park their money with a company that is less profitable than a rival if it maintains a consistent dividend policy.

If a company is forced to reduce its dividend payment for whatever reason, institutional investors will not be happy. Anglo American, the London-listed mining giant, learnt this the hard way in 2009. The company, which depends on institutional investors, suspended its dividend because demand for platinum, its chief produce, had fallen.

The announcement cost Anglo almost 17 per cent of the value of its share price. Annoyed shareholders will do that to you.

Dividends present companies, especially highly profitable ones like News Corp, with a problem. They lure investors, but place great pressure on the company to maintain them, in good times and bad.

This has been a special challenge for resource companies in recent years. Exxon Mobil, another one of the world's most profitable companies, spends billions each year on buybacks. Indeed, the company has more cash than it can find investments to spend it on. In 2006, Exxon spent 60 per cent, or $29bn, on its own shares - more than any other S&P500 company before or since, according to Bloomberg.

In some respects, a share buyback is also an act of faith by the management of the company. It says, in effect, that the people who are running things and, therefore, know the company better than anyone, believe its stock is going cheap.

By upping his buyback of stock, Mr Murdoch is effectively saying he believes it is worth a lot more than he paid for it.

The payoff of buybacks goes beyond short-term underpinning of the price. In the future, these shares can be reissued. The company gets a fresh injection of capital without having to raise additional loans.

In the meantime, shareholders will also benefit from the overall reduction in stock, thus driving up earnings per share.

In the case of News Corp, it would seem its future grows murkier by the day. For those who have invested in Mr Murdoch's peculiar vision of the world, the buyback might be a way for them to cash in their chips.

I suspect that most, however, will be willing to bet that Mr Murdoch is not finished yet. And they will hang onto their stock and wait for everything to blow over.

Gavin du Venage is a business writer and entrepreneur based in South Africa. pf@thenational.ae