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The Guardian: It’s like they’re giving it away

The Guardian: It’s like they’re giving it away

“Take a look, for instance, at the oil companies. Yes, they are making handsome profits on the back of sky-high prices. But what are they doing with the cash? True, plenty is going on capital spending, finding and developing new resources, but plenty of it is going back to shareholders – both in the form of dividend payments and share buybacks. Royal Dutch Shell is spending $3.5bn (£1.9bn) buying its own shares”

Wednesday August 3, 2005

Buybacks can be double-edged sword

OK, it was a sunny day. There has been plenty of cheery news from the corporates reporting before the August holidays. The Bank of England’s monetary policy committee is widely expected to reduce interest rates tomorrow. The economic news from the United States and China seems benign.

There may, however, be just a little more behind the run, which has taken the FTSE 100 share index to its best level for more than three years.

Of course, oil at more than $60 a barrel is underpinning heavyweights like BP and Royal Dutch Shell. Of course, healthy corporate earnings are pushing analysts to revising ratings upwards.

But other forces are at work. Take a look, for instance, at the oil companies. Yes, they are making handsome profits on the back of sky-high prices. But what are they doing with the cash? True, plenty is going on capital spending, finding and developing new resources, but plenty of it is going back to shareholders – both in the form of dividend payments and share buybacks.

Royal Dutch Shell is spending $3.5bn (£1.9bn) buying its own shares. BP spent more than $4bn in the first half of the year. Such numbers won’t drive the share price through the roof, but they do provide a solid underpinning.

Nor are the oil groups alone. Reuters is spending £1bn during the next two years. AstraZeneca has spent $1.2bn from a programme of about $3bn. GlaxoSmithKline still has £1.4bn to spend. There are many others with a few hundred million to blow.

Share buybacks are a double-edged weapon, however – they add to the buoyant mood when profits are rising but are inclined to dry up when earnings are under pressure.

Nevertheless, it is better to return cash to shareholders than spend it on grandiose, overpriced or ill-conceived expansion programmes.

Dragon’s downer

Rachel Elnaugh is used to grilling aspiring entrepreneurs on BBC2’s Dragon’s Den show. Together with her co-panelists, she would often smirk at the many flaky or downright crackpot business pitches on the show. Now, however, it is her turn.

Less than three months ago, her Red Letter Days business announced its intention to seek a listing on Aim. The company was hoping for a valuation of up to £25m and experienced City hand Sir Rodney Walker was headhunted to steer the firm to market as chairman.

But what Sir Rodney found was excessive overheads, rising supplier bills and unrealistic accounting. Within weeks of his intervention, the company was in administration. Many voucher holders have no guarantee their Red Letters will be honoured, and one of Ms Elnaugh’s fellow Dragons has picked up the company minus its cashflow problems.

The administrators at Kroll will give Ms Elnaugh and her directors a grilling – as required under DTI rules – as they attempt to discover how such an expert got it all so staggeringly wrong.

Me and Mr Jones

Sir Ken Morrison and David Jones – the man in charge of hauling Wm Morrison’s corporate governance into the 21st century – are up in front of the Association of British Insurers’ investment committee today to update shareholders on the hunt for another non-executive director.

Mr Jones has so far appointed three independents – a quantum leap for Sir Ken, who once dismissed the very idea of non-executives on the grounds that he could get two shop girls for the price of one non-executive – but a fourth has been promised and the company had said it might have news by the end of last month.

In the event it had none. It had a short list of half a dozen names and suggested it was Mr Jones’ fault the list hadn’t been whittled down because he had taken off to Spain on holiday. It is a crucial appointment, for the person selected is likely to take over as chairman from Sir Ken, probably in quite short order.

The investment committee will want to know how near, or far, the struggling supermarket is from getting its man or woman. It will want detail about sticking points and hold-ups. If there is no sign of anybody signing on the dotted line, they are likely to tell the two men to concentrate on running the business and put the search on ice until 2006. But if there is any tiny sign of friction between them, Sir Ken will be left in no doubt: they support Mr Jones.

Flanagan’s way

Marty Flanagan, the new chief executive of troubled fund manager Amvescap, is on day two of his job – and in a bid situation.

CI Financial, the Canadian fund manager, is refusing to give up its interest in Amvescap, which combines Canada’s Aim Trimark, Aim in the US and Invesco Perpetual in the UK. The Canadians’ target is Aim Trimark, but they seem ready to bid for the lot to get their hands on it. Mr Flanagan made clear yesterday he joined Amvescap to run a global asset management firm. He certainly has the pay packet to prove it.

Amvescap’s shareholders will want answers. Mr Flanagan has few – and he must be aware that he cannot hide behind being the new boy for very long.

http://www.guardian.co.uk/business/story/0,,1541417,00.html

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