British companies are buying back their shares at a faster rate than even US groups, adopting a practice that has drawn criticism for allegedly detracting from investment and innovation and come under fire from lawmakers in both countries.
FTSE 100 companies made commitments to buy back at least £56.9bn of shares last year, according to investment platform AJ Bell, having pledged to buy back more than £50bn of their shares in both 2023 and 2022.
As a proportion of the market, 44 per cent of large companies in the UK reduced their share count by at least 1 per cent in 2024, pushing it ahead of the US, at 39 per cent, for the first time, according to calculations by fund firm Schroders using MSCI indices.
“We seem to be going all guns blazing at the share buyback,” said Adrian Gosden, a UK equity income manager at Jupiter Asset Management in London.
The trend marks a shift in thinking among UK companies, which have historically favoured dividends as a way of returning money to shareholders, making the British market attractive to income investors.
At the end of October oil major Shell committed to another $3.5bn of share buybacks, taking its total last year to more than £10bn. In July, HSBC unveiled a $3bn buyback amid better than expected profits. British Gas owner Centrica in December said it would add £300mn to its existing buyback programme, bringing total planned repurchases to £1.5bn.
In a buyback, a company purchases its own shares in the market and then cancels them or holds them in storage, known as treasury. If it cancels them, this reduces the number of shares outstanding and therefore increases earnings per share.
Executives typically conduct buybacks if they believe there are no attractive acquisitions to be made or to signal that the stock is undervalued. Repurchases also tend to be more tax-efficient than dividends.
The value of dividends paid out by FTSE 100 companies grew steadily throughout the 2010s but has remained roughly flat since the coronavirus pandemic, according to figures from AJ Bell, as UK companies increasingly favour the flexibility of one-off buybacks.
“Dividends are seen as a commitment,” said Alvin Chen, a researcher at the Stockholm School of Economics. Unexpectedly lowering a dividend “is seen by the market as a terrible thing”.
Even a special dividend did not deliver the same advantages as a buyback because it did not send the same signal to the market that the company believed its shares were undervalued, Chen added.
Investors said the rise in UK buybacks could be linked to the comparatively low valuations of much of the London stock market, which has in recent years fallen behind many of its international peers. The FTSE 100 rose 5.7 per cent last year compared with the S&P’s 23.3 per cent rise. The UK benchmark is trading on forward price/earnings ratio of 11.2 times earnings, against the US index’s 21.4 times, according to LSEG data.
Buybacks also provide a way for UK companies to provide support to their share prices, helping counter years of investor outflows.
But some investors say buybacks simply deliver a short-term sugar high for earnings per share metrics used to calculate executive pay, rather than a sustainable boost to shareholder returns or an improvement in the company’s operating performance.
Academics say assessing whether a buyback will boost long-term shareholder value is complex and riddled with unknowns. For instance, they say, it is unclear if the money could have been better spent on research — for instance, inventing a new blockbuster product — or acquiring a competitor, raising staff pay or recruiting talent.
Nevertheless, most in-depth studies have found that, on average, groups that repurchase their own shares typically outperform those that do not. The S&P 500 Buyback index — an equal-weighted index of the 100 stocks in the US benchmark S&P 500 index that spend the highest share of their cash repurchasing their shares relative to their market capitalisation — has outperformed the broader S&P 500 Equal Weight index in 14 of the past 20 years, including in 2024.
However, it was difficult to infer causality, according to Alice Bonaimé, an associate professor of finance at the University of Arizona. “Did the companies outperform the market because of the repurchase? Or were the outperformers the ones with extra cash on hand ready to be used in a repurchase programme?”
At a minimum, however, “it doesn’t look like repurchases destroy long-term shareholder value”, she said.
Alberto Manconi, an associate professor of finance at Milan’s Bocconi University, has similarly found that buybacks “don’t hurt” long-term shareholders. His research, which compared the total returns of 9,000 companies between 1998 and 2010 following buyback announcements, found that repurchases were generally followed by “positive long-run excess returns”, with the greatest benefits accruing to “small, beaten-up, value stocks”.
But some lawmakers and academics say that rather than trying to boost share prices, companies should instead be spending excess cash on innovation or investment.
Plane maker Boeing, which is struggling to turn around its finances, has come under fire for conducting about $44bn of buybacks between 2013 and 2019 rather than investing the money in improving its operations. It declined to comment on the criticism.
“As this really extreme example of shareholder primacy, [buybacks] have this real harm of moving corporations away from investment,” said Lenore Palladino, an assistant professor of economics and public policy at the University of Massachusetts, Amherst.
Gervais Williams, head of equities at Premier Miton Investors, said he did not “blame” companies buying back shares when valuations are low, “but that means they’re investing less in the community [and] in skilled employment”.
Ahead of the 2024 election in November, US President Joe Biden’s team proposed quadrupling the levy on buybacks it implemented in 2022 as part of efforts to make big corporations “pay their fair share”. Incoming president Donald Trump made no such campaign promises, although in 2020 he said he was “never happy” that companies were using excess cash to buy back their shares.
The UK’s Liberal Democrats last year called for a 4 per cent tax on buybacks, arguing that “instead of reinvesting their profits in skills, equipment or clean technology, many big corporations are just buying back shares to inflate their own share price”.
Others counter that there is little evidence that capital spent on buybacks will be redirected to investment in research, acquisitions, staff pay or expansion.
For the London market, the rise of buybacks showed it was becoming “more international”, particularly given that US investors “are more comfortable with buybacks”, said Charles Hall, head of research at UK broker Peel Hunt.
In 2022, a record 57.7 per cent of the value of the UK stock market was held by overseas investors, according to official data.
“It also reflects the fact that UK companies, by historic standards, are very good value,” Hall said. “Given where valuations are [in the UK] at the moment, share buybacks look pretty sensible.”
Additional reporting by George Steer
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