Ask Colin

What effect does a capital return have on share price? If it reflects a better financial position of the company is it likely to have a negligible impact?

Theoretically, a capital return will reduce the price of a stock by the amount of the capital return.

The way to understand this is to consider that today you own a share worth $10. If the company makes a $1 capital return, then $1 has flowed from the company to you. So you have a share worth $9 and cash of $1.

Whether it is good for the company and how the share price moves in future is really a separate issue to the immediate effect. If the capital was surplus, it may have a negligible future effect. However, if capital were to be returned by raising debt then if the gearing were positive, it may increase future profitability, as measured by return on equity.

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