Equity Research; US v UK Buybacks
US share buybacks; big and bigger
Share buybacks have been important in driving US investor returns, for two decades now. Indeed they are considered part of the shareholder return expectation, if a co suddenly stops buying its own shares, or lets its buyback authorization expire, that is viewed as negative.
According to Goldman Sachs, total cash spend by US corporates on share buybacks is expected to rise from $925bn in 2024 (+13% on 2023) to $1.08trn (+16%) in 2025. From the diagram below, during this decade US share buybacks seem to be moving to an area approximately double the previous decade. This is impressive given the US bull market has vastly increased the cost of equity buybacks.
President Biden introduced a new 1% excise tax on share buybacks that was enacted in mid 2022 on US companies repurchasing more than $1m of its shares over a 12 month period. The use of shareholder funds for a buyback is considered tax efficient over dividends taxable at up to 37%.
The bulk of this expected $925bn in 2024 comes from ‘megacap’ companies. Apple speaks for $110bn, Alphabet $70bn, Meta $50bn etc. However very big buybacks are broadening out into other sectors, Chevron has got started on its $75bn buyback.
A share buyback operation can create a few issues:-
a) The buyback program causes the share price to rise then the company overpays for its own shares; i.e. ‘a ramp’ effect
b) the buyback damages the free float, the shares become illiquid
c) the buyback by reducing minority interests leaves a majority/ controlling shareholder in a stronger position at no cost to them
d) Sacrificing more pressing corporate objectives
e) Using debt funding to buy shares that are cancelled, increasing debt liabilities
f) Repurchased shares are held in treasury for internal distribution to directors and employees
There have been instances where share buybacks have had adverse impacts i.e. where the company prioritized a share buyback when it should have invested in R&D or plant and machinery. Intel and GM are good examples of this where arguably the company’s core competitive advantage was lost because of the size and timing of a share buyback.
Assuming the share buyback is cash funded, and purchased shares are then cancelled, the buyback reduces outstanding share capital on a cumulative basis, and other factors being equal, increases EPS. A typical 3% annual buyback will reduce share capital by 14% after 5 years.
Data from Schroders shows that 38% of US companies bought back at least 1% of outstanding shares in 2023, however 9% of large US companies bought back at least 5%.
US Hedge funds, activist investors often acquire shares with the aim of pressuring the company to increase its buyback, often with the result of buying back their block of shares. Whilst generic description do not always apply, the US share buybacks are in many cases considered part of the normal shareholder return and a way of recycling surplus cash to ensure balance sheet efficiency. The motivation is financial engineering in many cases.
UK share buybacks; do they differ from the US?
UK companies stepped up in 2023 with new share buyback programs. Data from Schroders show 13% of large UK companies bought back at least 5% of their shares over 2023 (this proportion is higher than the US).
Unlike the US, part of the motivation is inexpensive UK valuations i.e. the buyback is partly an effort to revive the share price.
A further motivation is the UK is the fact that buybacks improve tax efficiency v dividends which create taxable income.
Furthermore due to the UK’s high yield investor preferences, a UK company arguably gets more value for its share buyback in that it is potentially reducing its cash dividend costs going forward.
The timing of the UK share buybacks coming after a number of tough years and weak returns, are intended to signal the company taking a proactive position on its own equity. The buyback should instill confidence amongst shareholders that the board see the company’s own valuation as too low and will deploy its surplus cash to address the matter.
Source: AJ Bell plc
One nuance that pertains to UK buybacks only is the ‘special dividend’ the one off payment that is an increasingly common way of dispersing cash from sales of major assets within the business.
The annual total share buybacks, special dividends and ordinary dividends at £130bn in 2023 amounts to 6.4% return on UK plc’s £2.03trn market capitalisation.
| Company | 2023 | 2024 (E) | Comment |
| Shell | $14.61bn | $3.5bn / QTR | 6.85% drop in o/s shares in 2023. 2024 likely similar |
| BP | $7.92bn | $2.58bn/ YTD | 7.8% drop in o/s shares in 2023. 2024 likely similar |
| HSBC | $7bn | $2bn/ $3bn | 30th April HSBC launched a new $3bn buyback |
| Barclays | £3bn | Est £3bn | £10bn return plan for 2024-2026 |
| Unilever | €3bn | €850m / QTR | 13.3% increase in buyback |
| Lloyds | £2bn | £2bn | 10% o/s shares buyback p.a. is informal guidance |
| StanChart | $1bn | $1bn | $5bn return plan for 2024-2026 |
| NatWest | £1.8bn | £300m | NWG has reduced shares by 30% since 2020 |
| BAE Systems | £1.5bn | £1.5bn | Intention is to materially reduce share capital |
| Glencore | $1.2bn | $1.5bn | |
| Diageo | £500m | $1bn | Diageo repurchased £4.5bn in 2020-2023 |
| Imperial Brands | £1.1bn | £1.5bn | Intention is to materially reduce share capital |
| British American Tobacco | £700m | £900m | Part funded by sale of Indian subsidiary |
| Compass | £750m | $500m | Compass adopted USD accounting in FY24 |
| Informa | £1.15bn | £500m |
Source: CSS Investments
Post 2023 prelims UK plc have continued with extending their share buybacks this year [a very good sign].
Particularly eye-catching was Barclays promise to buy £10bn worth of shares from 21st February 2024 to end 2026. This amounted to c.41% of Barclays share capital on the news, but now is c.33%.
NatWest has increased its annual buyback authority to 15% (from 5%) of share capital to enable it to pick up more of the UK government’s stake.
Conclusion
Overall share buybacks are now part of the annual expected return in the UK, certainly in respect of UK blue chips – this having been the case for some time in the USA.
As a shareholder tool, the share buyback also works as a useful filter, companies that are not generating cash or having strained balance sheets are not likely to want to buyback shares. This implies a skewed effect between companies with / without a buyback mandate. They are also a good pressure tool to get board to divest the company of excessive cash balances.
Share buybacks are helping to fill the gap caused by weaker UK institutional interest, caused by liability driven pension management. These strategies have seen a drop in UK equity exposure to c. 4% of the typical UK pension fund. The buybacks represent for some companies a major new source of demand for their shares that was not there before. It could help end the ‘drift’ seen in UK equity indices for the last two decades.
Whilst its early days, the new approach to redirect cash payouts in favour of share buybacks has not yet caused any noticeable casualties. No one has objected so far to company buyback plans. However, there may be liquidity impacts if the current pace of buybacks continue at this pace. The real test will come if/ when the buyback crutch is withdrawn.