Shareholder distribution choices for industrial companies listed on the JSE : share buybacks versus dividends

ENGLISH ABSTRACT: Repurchasing of shares by South African companies were legalised on 1 July 1999.This introduced an alternative to dividends for distributing cash to shareholders.Although dividends and share repurchases realise the same value in a perfect efficientmarket, the inefficiencies of the South African stock market require managers tocarefully evaluate factors like taxation and stock price valuation when selectingappropriate distribution methods.This research report aims to update shareholder distribution trends for industrial JSElisted companies over the past 10 years in order to determine the impact of sharerepurchases on dividend payouts. Furthermore, this research report examines thefactors that may have had an impact on shareholder distribution choices in order toprovide some guidelines for choosing appropriate distribution methods.An initial analysis of SENS share repurchase announcements revealed that 121 JSElisted companies repurchased about R50 billion worth of shares up to 30 June 2007.The bulk of the shares, 65% by value, were repurchased on the open market, while35% was repurchased through specific fixed price offers. However, a comparison ofaccurate share repurchase data obtained from a sample of company annual reports,indicate that repurchase announcements understate actual repurchases by more than20% on average. Further analysis of distribution trends were therefore based on actualrepurchase data published in annual reports rather than SENS announcements.After the legalisation of share repurchases in South Africa, a decline in dividend payingcompanies was expected similar to that experienced by the United States since the80's. However, a detailed analysis of 132 industrial listed companies indicated that theproportion of dividend paying companies increased from a level of 50% to almost 75%since the introduction of share repurchases. On the other hand, the proportion ofcompanies repurchasing shares initially rose to over 25%, but then declined to below20% by 2007.Ordinary dividends are the dominant shareholder distribution choice with 64% ofcompanies opting for this method. Open market share repurchases have been welladopted with 17% of companies using this method, while only 5% and 4% ofcompanies using special dividends or specific repurchases respectively. Dividendspaid out of share premium (capital distributions) have also emerged as a favourite overrecent years with almost 20% of companies using this shareholder distribution method.Current tax legislation do not provide all the advantages usually enjoyed by sharerepurchases internationally and have largely prevented dividends from beingsubstituted by share repurchases. The decline in share repurchases up to 2007 alsoindicates that share repurchases become less effective as share prices increase toovervalued levels. While tax implications and stock price valuation remain thedominant determinants of shareholder distribution choice, this study shows thatshareholder diversity, dividend preferences, size of distribution, and BEE requirementsalso have significant influences on the choice of distribution method in the SouthAfrican context.