Experts question surge in buybacks after record spree in 2022
Experts have raised questions about the spate of share buybacks undertaken by UK companies over the past year.
Buybacks reached record levels globally in 2022 according to recent figures from Janus Henderson, rising 22 per cent year-on-year to hit $1.3trn. Buybacks were worth 94 per cent of dividends in 2022, compared to 52 per cent in 2012.
In the UK, the increase was significantly greater, as buybacks nearly tripled. $70.53bn shares were bought back in 2022 compared to $24.61bn the year before.
Oil and gas giants Shell and BP were the lead contributors, buying back $19bn and $11bn worth of shares respectively. The FTSE 100’s five banking behemoths also contributed substantially to this increase repurchasing $16.7bn between them
Already this year FTSE 100 oil and gas giants have bought back £7.9bn shares while financial firms have repurchased £6.8bn.
The scale of the buybacks has raised questions about the best way for firms to reward shareholders, with some experts arguing they do not benefit shareholders as much as dividends.
Ben Lofthouse, head of global equity income at Janus Henderson said: “Buybacks cannot always be relied on to enhance shareholder returns. Their discretionary nature makes them more volatile – as evidenced in 2020’s Covid disruption when they fell dramatically.”
He noted that shareholders who rely on an income stream from their investments often prefer dividends.
Similarly, director at ACA Group Andrew Poole said “dividend payments clearly provide a greater immediate benefit to the general investor, especially retail investors, with realised and, ideally, predictable cash flows.”
Poole even suggested that with the incoming Consumer Duty, the Financial Conduct Authority (FCA) may explore the relationship between dividends and buybacks.
AJ Bell’s Russ Mould pointed out that buybacks can be used to “massage” earnings per share figures by reducing the share count. In some cases, this can trigger management rewards.
However, some analysts argued that buybacks actually reflect a vote of confidence in the firm, suggesting that markets undervalue entire sectors.
Referencing the banking sector in particular, Hargreaves Lansdown’s Sophie Lund-Yates said the sector has come under “significant pressure”. In some cases, she suggested this was “overdone.”
“The change of course to more buybacks is a marker of confidence in the UK’s financial sector, and a realisation that the market is overlooking some fundamental strengths,” she said.
Adrian West, partner at Travers Smith agreed that the “main driver” of buybacks was the perception that shares were undervalued. In addition, he argued “creating some liquidity in the shares is also a benefit compared to paying a dividend.”