Lloyd's bank share buy back commences...

It is not uncommon for a company which has more capital than it needs, to return it by buying back its own shares and cancelling them.

This can have the effect of improving the share price because for the duration of the buy-back program there is another buyer in the market - a billion pounds available from Lloyds itself will create more demand to take shares off people's hands if people are looking to exit. All the sellers can get matched with buyers because there's a big buyer.

Some people are cynical about buybacks but ultimately the company is more valuable, per share in issue, if it has a greater proportion of 'working' assets and a smaller proportion of idle cash. Unless it can redeploy those idle assets in something as profitable as the average of what it is doing with its other assets, it should give the money back to the company's owners to invest as they see fit.

Rather than physically sending the owners the cash, they can simply have a market buyback program where they facilitate an orderly exit from investors who would have otherwise wanted to sell shares on the stockmarket which would have depressed the company's price. The shares are then cancelled leaving fewer shares in issue and a greater proportion of 'useful' profitable assets per share.

Example: £1 share price, 50 billion shares in issue, £48 bn of assets used in operations to generate profits at 5% a year , £1bn of cash giving necessary liquidity to absorb any issues that come up, £1 bn of further liquid assets not doing very much and earning only 0.5% a year on rolling deposit, well below the return of the regular normal profitable assets.

Alternatively get rid of the "£1bn of further liquid assets earning 0.5% a year" and just have 49bn shares in issue supporting the £48bn of productive assets generating 5% a year return on capital and £1bn of necessary cash to absorb any liquidity issues.

After doing the buy back and reaching the second situation the company has a greater proportion of its total assets being used to do productive stuff, generating more profit per share ; and the willingness to buy in the market can stimulate demand for the shares because nobody needs to sell them at 65p a share if Lloyds themselves will buy them back for a pound.

[numbers are examples only]

Average volume 150 million shares traded a day. Today happened to be about 130 million.

With that sort of volume, one might say: "Less than 30 million bought over a multi-day period? Expected market reaction - not that much!"

As you'll have seen, markets are volatile at present. The fact that Lloyds shares haven't jumped up to a higher price does not mean there's been no beneficial price effect from Lloyds being a buyer in the market for up to hundreds of millions of pounds worth of purchases of their own shares. Consider what the price might have been if they hadn't bought all those shares. Compare what the price is and what it might have been if they hadn't done the purchases, and then you can perhaps better gauge whether the market 'reacted' or not. But likely you can't gauge it because you don't really know what the price was going to be without the purchases.

veryintrigued wrote: »

29 million bought back in the last 36hrs.

The markets reaction?! Not that much!

Sounds like a staged repurchase then. There was a single trade of 28,437,108 shares for a consideration of £18.5 million today.

Companies buying back their own shares are a bit like the Oszlum bird; watch out