Spurred by the speed of global vaccination roll-outs, stimulus boosts and a white-hot US first-quarter earnings period, some US companies have upped dividend payments to their shareholders.
Alternatively, they're buying back their own shares in 'buybacks'. So what are share buybacks? Is the UK seeing a similar wave – and how good an idea are share buybacks for investors?
Share buybacks in brief
While many households hoarded cash during the pandemic, many companies did the same, wary of how their business would cope as the 2020 pandemic spread.
- In a crisis it’s useful for companies to send a signal to shareholders that they’re behaving responsibly – hence a measure of cash stockpiling
- But post-crisis, company share buybacks can look pricey: buying shares at market price with cash isn’t always cheap, especially if the shares are trading above their intrinsic worth.
The US has witnessed a blow-out pace of share buybacks in the first four months of 2021, which is worth $484bn according to Goldman Sachs. These buybacks include Apple, which repurchased $19bn in stock in the last quarter, which is just part of the $77bn of its own shares it has purchased in the last 12 months.
Microsoft also bought $7bn of its stock in the last quarter. Away from stateside tech companies, US pharma company Biogen recently bought $600m of its shares in the first quarter. Yet this is a fraction of what Biogen spent in 2020, lashing out on a $6.7bn spending spree on its own stock.
But a philosophical divide to buybacks lurk – shouldn’t companies spend cash balances and time focusing on commercial opportunities or R&D, not financial engineering?
In other words, don’t share buybacks look a bit lazy?
Run out of ideas?
The UK Shareholders' Association represents the interests of retail investors. Its policy director, Dr Dean Buckner, says share buybacks have a place when a company has no other good use for cash.
“A share buyback can be a tax-efficient way of returning money to shareholders,” he told Capital. "However, shareholders should be cautious”
“Buybacks,” he goes on, “can simply be the result of City pressure to leverage up to increase returns but with increased risk and volatility”
“Or, more shamefully, [are] executive efforts to manipulate earnings-per-share targets for their bonus plans.”
Buckner points out that the way company debt and assets are taxed can encourage more leverage – to the detriment of stability and risk-taking. “Add to that,” he says, "after COVID-19, many companies are going to emerge with dramatically transformed balance sheets – typically, but not necessarily, over-leveraged.”
So share buybacks should be viewed with caution.
- For much of the 20th century, share buybacks were considered either illegal or somewhat close to the bone
- Market manipulation accusations were fairly common
- Last year the US Federal Reserve was so concerned about the health of some stocks it imposed restrictions on buybacks – only now are some of these being relaxed
Consumers on a sugar ‘high’
Yet with some of the global economy in growth mode and many consumers on an intense spending spree, courtesy of pandemic furloughs or pandemic self-restraint, some companies feel buybacks are a smart way of managing risk as consumers buy heavily into goods and services.
Especially when low interest rates mean finding homes for cash is a struggle. So if there’s a surplus swirling about, it’s easier to buy back shares. And if bad news comes your way, the program can be paused – no need to cut dividends, which often attracts negative headlines and scrutiny.
However many of the current share buybacks look expensive compared to company valuations in March 2020 when many shares were dirt cheap.
As an alternative to buybacks, some companies have the option to issue a special dividend – which shouldn’t increase earnings per share or the management bonuses linked to them. A fairer option, some argue.
The UK 2021 buyback frenzy includes Unilever (£2.6bn), NatWest (£1.13bn), IMI (£200m), Diageo (£1bn), CRH (£216m), Frasers Group (£60m), WPP (£620m) and Sage (£300m).
Buffet – more for your buck
So a shares buyback can often mean the value of your shares rise because there are fewer shares in circulation. It means buybacks give you more stock – for little extra effort.
When investor Warren Buffett buys Apple stock, he’s fairly sure Apple will repurchase more shares.
"We own about 5%,” he told CNBC in 2018. “But I know I don't have to do a thing and probably in a couple of years, we'll own 6% without laying out another dollar. Well, I love the idea of having 5% go to 6%.