First TD Buyback in 6 Years Seen Helping Stock: Corporate Canada

Toronto-Dominion Bank’s first share buyback in more than six years adds to a 10-year high in Canadian capital repurchases as companies try to soften the blow of underperforming stock prices.

Toronto-Dominion, the country’s second-largest bank by assets, said yesterday it set aside C$1 billion (C$971 million) to repurchase 12 million shares, or 1.3 percent, of its stock starting next month, the first common share buyback since 2006.

TD joins companies including food group George Weston Ltd., rewards program owner Aimia Inc. and insurer Intact Financial Corp. offering to buy back shares. National Bank of Canada, the country’s sixth-largest lender, said today it plans to buy back as much as 2 percent of its shares starting in June.

“In the case of a slow-growth economic environment where you can’t grow your business, then it seems the reasonable way to enhance shareholder value is through stock buybacks or dividend increases,” Anish Chopra, a fund manager at TD Asset Management Ltd., said in phone interview from Toronto yesterday.

Companies on Canada’s benchmark Standard & Poor’s/TSX Composite Index have repurchased C$22.1 billion of treasury stock and shares on average in each of the past two years through yesterday, according to data compiled by Bloomberg. That’s the highest two-year period in at least 10 years.

By comparison, U.S. companies in the S&P 500 have purchased an average of $366.2 billion in stock in the same period, which is a four-year high, the data show.

Lagging U.S.

Buybacks can add to earnings per share for companies by paring the number of shares outstanding and reducing the amount of dividends paid out.

The repurchases come as Canadian stocks lag behind their U.S. peers. The Canadian benchmark has risen 1.8 percent this year, compared with a 16 percent rise in the S&P 500 index, and is on track for its third year of underperformance against the U.S.

The S&P/TSX is expected to rise 4.6 percent in 2013, according to the average year-end estimates of seven strategists surveyed by Bloomberg. That compares with an expected 14 percent jump for the S&P 500, according to a separate survey.

To be sure, not all firms and investors are in favor of buybacks.

“It’s not a prudent use of the company’s liquidity at this point,” David Pathe, chief executive officer of Sherritt International Corp., said yesterday at the company’s annual shareholder meeting in Toronto. “If we bought back shares any benefit that we created in the share price would be fleeting and I think it would just simply increase the risk for the remainder of the shareholder base of the company.”

Dividend Better

Sherritt, a diversified mining and energy company, had faced calls from Scott Leckie, principal with Takota Asset Management Inc., to begin a share-buyback program. Takota, which held an undisclosed position in the company, said in a May 7 statement that Sherritt’s share price was “heavily discounted relative to the intrinsic value of its business.”

John Stephenson, a fund manager with First Asset Investment Management Inc. in Toronto, said there’s no long-term benefit to investors from a share buyback.

“You’re better off with a consistent dividend policy,” said Stephenson, whose firm manages C$2.7 billion. “That’s where you get the biggest bang for your buck.”

Royal Bank of Canada, Bank of Montreal and Canadian Imperial Bank of Commerce are among the country’s lenders using buybacks in the past year along with dividend increases while global peers focus on rebuilding their balance sheets to meet regulators’ higher capital standards.

Unofficial Slogan

A market in which “give me dividends or give me death!” has become the unofficial slogan gives banks food for thought on how best to deploy the excess capital that continues to accumulate, Sumit Malhotra, an analyst with Macquarie Capital Markets, wrote in a May 21 note.

Canadian banks “are continuing to be the global leaders and are so well positioned with strong balance sheets and strong capital,” Colleen Johnston, TD’s chief financial officer, said yesterday in an interview. “We’re in a position where we can start thinking about capital deployment.”

Royal Bank, Canada’s largest lender, said in October it planned to repurchase 30 million shares, or 2.1 percent of its stock, over a year. Bank of Montreal, the fourth-largest lender, said in January it would buy 15 million shares, or 2.3 percent of its float. CIBC said in February it bought back 3.34 million shares under its September plan to repurchase 2 percent of its stock.

The use of buybacks and dividends as well as flexibility and the ability to adapt to changing markets are all important factors when considering a potential investment in any company, TD’s Chopra said

“Once you’ve increased your dividend to a certain level it generally stays there, as companies and management teams are reluctant to reduce that,” Chopra said. “But they have much more flexibility with a buyback program because you can choose not to renew it, modify it or time purchases. It gives you more flexibility.”

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