Forum Archive Index - October 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

terry wrote:
>
>Snoopy wrote:
>
>>The annoying thing is they could obtain the same increase in
>>ROE by just paying the excess capital back to the shareholders
>>in the form of a special dividend.  So WHY DIDN'T THEY DO IT!
>> 
> 
>I guess the obvious reason is that the special dividend 
>would be taxable to the shareholder. Whereas a buyback returns
>capital in a cost/tax effective manner for the buy/hold shareholder.
> The brokers would also make a little pocket money.
> 

I accept your answer Terry.  You are right in that paying back 
capital in a lump would be taxable to the shareholders.

However, I fail to see that buying shares at a fully valued price 
(or more as they will have to push the share price up to do it), will 
create wealth for shareholders.   After the buyback has finished the 
share price will drift back (with the associated loss in market 
value of the shares for all shareholders) to fair value.

This doesn't make *investment* sense to me.  Yes, you have made sure 
that 33% of the capital returned keeps out of the hands of the 
government.   But you have destroyed 66% of the capital in buying a 
fully/over valued asset which the directors admit has no immediate 
significant growth prospects.

It seems to me that in a mania to minimse paying tax at any cost, 
the board of STU have made a very poor investment decision for 
remaining shareholders.   I guess the good side of a buyback is that 
it gives a good opportunity for shareholders who feel this way to 
exit at a good price above normal market value during the buyback!

SNOOPY





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