In articles such as Missed bargains, we have highlighted the different corporate strategies of AstraZeneca and GlaxoSmithKline, the two giants of the UK pharmaceutical sector. 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.
As a postscript to our call to judge businesses by what they do rather than what they say, it is worth flagging up the ongoing share buyback programme of US technology company Seagate, which we last addressed in When is a profit warning not a profit warning? By the end of this year, Seagate is on schedule to have a total of 350 million shares in issue – down from 560 million in 2007.
Now, in its latest results, the group has issued guidance that, by the end of June 2014, it will have brought that figure down to 250 million shares outstanding. In other words, if management’s current intentions pan out – and nothing is ever certain in investment –Seagate will have within seven years shrunk its equity base by more than half.