Criterion: Companies have cash to splash and it's raining down on shareholders
Share buybacks improve earnings per share and usually result in long-term share support
JB Hi-Fi is tipped to pay a special dividend when it reports on Monday
As local profit reporting unfolds in earnest next week, investors can expect a slew of companies to announce share buybacks or special dividends to soak up excess capital.
To some investors, returning capital is a sign that management has run out of growth ideas - a strategic capitulation.
To most, remitting the spare cash makes better sense than either hoarding it or pursuing a hare-brained acquisition.
'If a company doesn't have attractive investment opportunities and the balance sheet is starting to look lazy, a special dividend can make a lot of sense,' says Lazard Asset Management's Aaron Binsted.
'It also demonstrates that a board takes shareholder funds seriously and the market is more likely to support that company in future endeavours.'
Don't stash the cash
Share buybacks involve a company buying back its own shares and cancelling them, thus reducing the capital base and improving earnings per share.
Boards often deploy buybacks when they think the market undervalues the shares. (Mind you, almost every board thinks that).
In February Telstra (ASX:TLS) announced a $750 million buyback which it completed in June.
Others including ResMed (ASX:RMD) and Corporate Travel Management (ASX:CTD) have buybacks in place.
According to Sandstone Insights, capital returns usually result in share prices being supported well beyond the announcement date.
'There is an enduring impact on outperformance,' says head of investment strategy John Lockton.
Buyback 'likely suspects'
The owner of Afterpay and the Square terminals, Block, Inc (ASX:XYZ) is surfing the resurgence of buy-now pay later and Square's strong growth in the US.
Block has a $4 billion buyback program – extended from $1 billion last year - but yesterday's quarterly disclosure shows the actual purchases have been at a far more languid rate.
This also highlights that while a company might have announced a program, it's under no obligation to buy.
With tapering capex, logistics house Brambles (ASX:BXB) could extend its recently-completed $600 million buyback.
The beneficiary of favourable regulatory capital changes, annuities specialist Challenger (ASX:CGF) could start one.
With insurers creaming it in, QBE Insurance (ASX:QBE) is in pole position to undertake its first-ever buyback.
Earlier this year Suncorp Group (ASX:SUN) distributed the $4.1 billion proceeds of its banking operation to the Australia and New Zealand Banking Group (ASX:ANZ). There's a chance of a second helping.
Special dividend candidates
Discretionary retailers are among the most likely companies to declare a special dividend.
Binsted notes that Super Retail Group (ASX:SUL) paid a special dividend in the last two financial year results 'and we suspect there may be a possibility for a third'.
The company may have its high-profile corporate governance issues, but it has a solid balance sheet with tapering capex requirements.
On Monday, JB HiFi (ASX:JBH) should post a bumper result – and perhaps pay a special div as it did last year.
Media companies usually sound like they're down to their last dollar. But that's not the case at Nine Entertainment Company (ASX:NEC), which is heaving with $1.4 billion of proceeds from the sale of its Domain stake to Costar.
Nine has flagged a shareholder return of 47-49 cents per share, but that accounts for only half the windfall.
TPG Telecom (ASX:TPG) similarly is flush with $5.3 billion from the sale of its fixed asset business to Vocus. Pundits suggest TPG will return about half to shareholders.
Great (earnings) Expectations
In order to sweeten shareholder returns, companies need further earnings in the first place.
That's not been the case over the last three years, with profits going backwards,
Sandstone's Lockton expects current year earnings expectations to settle at 6%. This will be spurred by the tech sector with forecast 25-30% growth.
For the time being at least, the market is willing to overlook the T – tariff – issue.
Lockton says even if tariffs are disruptive, "there's a wall of interest rate cuts both in the US and Australia to save the day.'
Enjoy the cash splash while it lasts.
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