7th August 2012
Over the years, Astra has tended to pursue the more shareholder-friendly actions, such as share buybacks and dividend payments, in addition to being less inclined to participate indiscriminately in mergers and acquisitions.
For its part, Glaxo, whose product pipeline has put it in a marginally stronger position, has been less aggressive on dividends and buybacks and has always stated it was in the market for potential deals. Bearing in mind their respective histories therefore, it has been interesting to note a change in the language employed by the two groups in recent months.
In the past, for example, Astra stated its buyback was at a certain level and would only be reduced or cancelled if something extreme happened to the business. Now, however, the buyback is subject to the general needs of the business, which is such a broad caveat that further share repurchases can no longer be taken for granted.
By contrast, Glaxo recently increased its hurdle rate for new deals – in other words, it has tightened up the criteria on which it is prepared to proceed with any new acquisition, thereby making one less likely. As a consequence, the remaining cash on an already strong balance sheet and which the company does not need could well now be added to the existing buyback authorisation.
As value investors, we find this very interesting and it once again illustrates how nothing in the stockmarket is set in stone. Companies change, as do their strategies. Astra is seeing a number of changes among its senior management while Glaxo has evidently taken the view that deals currently look unlikely to make the returns it could generate internally or through share buybacks.
All of which brings us back to the old adage that investors should pay attention to what companies do, not what they say. Over the last three months or so, Astra has made two – very expensive – acquisitions while Glaxo has made none and, arguably, the consensus view that Astra is the more shareholder-friendly of the two businesses may need to be revisited.
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