The positive start to 2023 proved short lived as most assets and indices retreated again in February driven by fears of resilient demand, stickier inflation and therefore potentially higher interest rates: good news was bad news. Whilst a monthly market narrative of changing index values is interesting and can be useful in managing certain risks, we believe that it is more important to focus our time on the businesses that we own and that make up those indices. It is after all, the business rather than the index that creates value for its shareholders and stakeholders.
During the month, we were pleased to see one of the businesses held within the funds, RELX, report revenues up 9% and profit up 13% on last year. Results were strong and the business appears to produce an ever-increasing amount of cash for management to deploy or return. But it is in how they deploy and return that cash that we would like RELX – and certain other businesses – to consider allowing themselves greater flexibility.
RELX management have set out a clear capital allocation strategy (as is the case for most listed businesses) – an order of preference in how they intend to use the cash generated by the business. At the top of the list, is investment within the existing business, followed by the acquisition of complementary businesses, a dividend in line with earnings, maintaining a steady level of debt and finally buying back and cancelling shares in the market with any remaining cash.
Buybacks act to reduce the overall share count and therefore increase our percentage ownership without us spending another penny – take it to the extreme and we could technically become 100% owners of any business in which we are a shareholder without buying a single share more. When shares are bought at reasonable prices, they can be hugely value accretive to existing shareholders but when bought at unreasonable prices that is not necessarily the case - a formulaic process that leads to shares being regularly bought back at any price fails to consider this. At RELX it is their formulaic process in this regard that may have led to sub optimal decisions with the share buyback cancelled in April 2020 when the shares traded at a roughly 35% premium to the FTSE 100 and then reinstated in February 2022 when the shares were available at a 75% premium to the FTSE 100.
RELX is a business delivering strong results with a track record of successfully deploying and returning capital but we see no harm in considering whether there are ways in which they can improve. We have engaged with the company on this matter but either way we are happy to conclude that generating excess cash is a nice problem to have.
The value of securities and their income can fall as well as rise. Past performance should not be seen as an indication of future results. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities. At times, the firm or employees of the firm may have positions in securities discussed. Should any conflict of interest arise, these are managed under conflicts of interest policy, a copy of which is available on request.
