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Speaker 1: Welcome to Ask Fear and Greed, where we answer questions

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Speaker 1: about business, investing, economics, politics are more. I'm Michael Thompson

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Speaker 1: and hello, Sean Aylmer.

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Speaker 2: Hello Michael, Sean.

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Speaker 1: This is an interesting one. It's more of anything, Michael.

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Speaker 2: They're all interesting.

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Speaker 1: I know, I know, but I mean some of them

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Speaker 1: are very interesting to you. Anything with economics, your eyes

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Speaker 1: just light up and you just suddenly become a buzz

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Speaker 1: with energy. And I think this is interesting as well,

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Speaker 1: but it's probably interesting to a lot of investors out there,

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Speaker 1: and not necessarily just the economists. May I go on,

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Speaker 1: please go on, please please stop talking. How do companies

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Speaker 1: decide when to do a share buyback? That's the question.

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Speaker 1: There is a supplementary little follow up question here. Why

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Speaker 1: would they do that instead of increasing or paying a dividend?

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Speaker 2: Ah the dark heart of capital management? Michael go on. So,

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Speaker 2: when a company finds itself with a stack of money,

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Speaker 2: it's got a bunch of options, right, so it can

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Speaker 2: pay down debt. So when I worked at Fairfax, Fairfax

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Speaker 2: Old Trade Me which was a New Zealand place, which

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Speaker 2: is a New Zealand asset, got a stack of cash.

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Speaker 2: Fairfax had lots of debt. They paid down the debt

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Speaker 2: and in fact, the CFL at one point showed me

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Speaker 2: the bank account and Fairfax had money in it, and

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Speaker 2: he was very excited that he had no debt. So

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Speaker 2: that's an option, right, you got cash, pay down debt. Okay,

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Speaker 2: that's option one, Option two invested somewhere. So look at

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Speaker 2: all the gold companies at the moment. Stacks of money,

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Speaker 2: get price of goals high. They got cash cash coming

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Speaker 2: out the UA Zoo. You're getting Goldfield and gold Road,

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Speaker 2: that m and a deal Newmont trying to buy Degray Mining.

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Speaker 2: You're getting lots of corporate activity because there's lots of cash. Right,

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Speaker 2: So that's option to invest it somewhere.

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Speaker 1: Okay, yep.

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Speaker 2: Number three three a dividend or a special dividend. So

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Speaker 2: when you've got a stack of cash, and if you

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Speaker 2: think of the big miners in recent years and the

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Speaker 2: banks in recent years, they've just got a lot of cash.

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Speaker 2: If the executive team and the board can't see something

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Speaker 2: to buy that'll give them a better term, then they say, well,

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Speaker 2: let's just pay a dividend. Now. With dividends, companies tend

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Speaker 2: to like steady dividends, so if all of a sudden

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Speaker 2: you've got to stack of cash, you might pay a

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Speaker 2: special dividend. It's a one off dividend. Normally though, they

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Speaker 2: just like dividends just to be steady. We had a

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Speaker 2: story about soul Pats this week where it's increased its

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Speaker 2: dividend every half year since two thousand, has paid one

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Speaker 2: every year since nine and oh six. That's how it works. Occasionally,

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Speaker 2: COVID was an example where dividends are cut, but most

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Speaker 2: companies don't like to do.

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Speaker 1: That, and so a special dividend is that then paid,

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Speaker 1: rather than just increasing the normal dividends. So on goes

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Speaker 1: back to normal the next year. It's not compared unfavorably

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Speaker 1: to the previous years.

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Speaker 2: Event exactly. That's exactly right. The fourth option, the share

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Speaker 2: buy back.

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Speaker 1: Oh here we go, Now what are we want? Three

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Speaker 1: and a half minutes in and you're finally addressing the

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Speaker 1: quidna I'm kidding. That was all important context.

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Speaker 2: Please go please. So in recent times, the big tech

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Speaker 2: companies in the US in particular have undertaken huge buybacks,

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Speaker 2: like hundreds of billions of dollars when it comes to

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Speaker 2: the Magnificent seven. When they buy back stock, they buy

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Speaker 2: the stock, they cancel it. It means that future earnings

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Speaker 2: is divided by fewer shares. That increases the return on

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Speaker 2: each individual share. So we've got four options. You've got paydown, debt, invested,

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Speaker 2: dividend slash, special dividend, share buy back. Mostly companies make

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Speaker 2: the decision on what they think is going to give

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Speaker 2: them the best return today. So you can look in

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Speaker 2: hindsight and say why they're or did they do a

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Speaker 2: buyback when they should have invested in something. But boards

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Speaker 2: executives are saying, right now, are we better to cancel

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Speaker 2: some shares, do a share buyback, cancel some shares because

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Speaker 2: there's nowhere better to put the money. And that often happens.

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Speaker 2: I mean, there's a bunch of buybacks going on on

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Speaker 2: the ax at the moment. Or like the gold companies,

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Speaker 2: they think, well, you know, we've got plenty of cash,

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Speaker 2: we can afford to buy other operators. Scale matters in

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Speaker 2: gold mining, and so maybe that's a better way to

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Speaker 2: do it. So it's quite I mean, it is fascinating.

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Speaker 2: In fact, earlier in this I talked about Newmont buying

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Speaker 2: to Gray Mining. That's not right. It's Northern Star buying

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Speaker 2: to gray Mining. I just correction there, Michael. So it's

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Speaker 2: what they think in that moment is going to give

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Speaker 2: the best shareholder return, and that's why they make that decision.

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Speaker 1: Gotcha, okay. And so in answering the question how do

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Speaker 1: companies decide when to do a share buyback, it's really

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Speaker 1: not a decision made in isolation. It's assessing each of

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Speaker 1: those other options and then decide to share buy back

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Speaker 1: is the best option for that current point in time.

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Speaker 2: Yeah, and to be honest, there's another option they might

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Speaker 2: decide that. So Westpack at the moment is doing a big,

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Speaker 2: big spend on getting its technology stack all as one.

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Speaker 2: It's got all these legacy products. So they could have

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Speaker 2: used that money for something else, but they think, actually

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Speaker 2: the best return for shareholders is to fix that PW

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Speaker 2: tech stack. Ye, future earnings will be better if we

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Speaker 2: can get that, right. So that's actually a fifth option.

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Speaker 2: So there's that as.

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Speaker 1: Well, investing back in themselves.

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Speaker 2: Essentially five options.

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Speaker 1: If you've given options, I asked you a two part question,

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Speaker 1: you gave me a five part answer. That's a record.

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Speaker 2: That's what I ask fear and Greeds about.

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Speaker 1: Indeed, it is thank you very much, Sean.

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Speaker 2: Thanks Michael.

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Speaker 1: Remember if you've got something that you'd like to know,

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Speaker 1: then please send three your question on LinkedIn, Instagram, Facebook,

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Speaker 1: or head along to our website Fearangreed dot com dot au.

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Speaker 1: I'm Michael Thompson and this is ask Fear and Greed