Blue Chip Issue 89

BLUE
CHIP
INVESTMENT | Economy
The increasing popularity
of share buybacks
Schroders’ research shows that buybacks became more widespread in 2022, with
some markets narrowing the gap with the US, where they’re most common.
Kondi Nkosi, Country Head
South Africa, Schroders
Companies on the S&P 500 index spent $3.9-trillion
buying back their own shares in the five years to 2022.
This surpasses the $2.5-trillion they paid out in dividends
over the same period. Buybacks divide opinion but one
thing is clear: corporate buying has provided an incremental
source of demand for US shares.
Our new research confirms that buybacks continued to be more
popular in the US than in other major markets in 2022. But that
gap narrowed – with their use becoming more widespread in the
UK, Europe and Japan. Buyback activity will always fluctuate over
time, and one year doesn’t make a trend. But as a tailwind for equity
demand and a mechanical boost for earnings per share numbers,
their increased popularity outside the US is worth keeping an eye on.
Why buybacks are a divisive subject
Share buybacks divide opinion. On the one hand, they are a way
for company management to return excess cash to shareholders
in a way that is less binding than a dividend increase. And they
can be more tax efficient for investors as capital gains are often
taxed at a lower rate than income. On the other hand, they
are open to criticism about being open to manipulation by
management. The same earnings divided by a smaller number
of shares leads to an increase in earnings “per share”. If executive
remuneration is naively linked to earnings per share growth
this could be enriching management at the possible expense
of shareholders.
Some also argue that they are a way for management to
prop up an ailing share price, again potentially to boost their
compensation. But the counterview is that if management
believes their shares to be undervalued then this would be the
best time to buy back their shares. An increase in buybacks may
also signal an absence of profitable investment opportunities
for the company concerned. So, rather than a positive, they
could be interpreted as a negative. One indication of the
strength of feeling about buybacks is that US policymakers have
recently introduced a “buyback tax”, forcing companies to pay
tax amounting to 1% of the value of any buybacks. This came
into effect on 1 January 2023.
US still leads buybacks, but UK and other markets closed the
gap in 2022
Based on our calculations, 45% of large US companies bought back
at least 1% of their shares during 2022 (net of any shares that were
issued). This is broadly in line with the average of the three years
before Covid (buyback activity dropped dramatically in 2020,
distorting any calculations encompassing this period).
More unusually, UK companies almost matched the US on this
basis last year (Figure 1). The proportion of UK companies buying
back at least 1% of their shares soared to a record high in 2022.
There has also been a rise in buyback activity among Japanese,
French and German companies. Activity remains limited in
emerging markets. In Japan’s case, many companies are valued
at less than the book value of their shares and are hoarding
cash. With regulators keen to see improvements in firms’ capital
efficiency, buybacks can be considered one effective use of that
cash, especially if shares can be bought back at a cheap valuation.
Buybacks are less common among smaller companies
Intuitively, smaller companies are less likely to engage in buyback
activity and more likely to issue new shares than larger companies.
Smaller firms are typically growing quicker and so potentially need
the extra capital. This may also explain why emerging market
companies have been less keen on buybacks. We can see this effect
by comparing the proportion of large-cap companies buying back
34 www.bluechipdigital.co.za