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INVESTORS, SHARE BUYBACKS AND THE ‘MANIPULATION’ OF SHARE PRICES


The constant growth of share buybacks raises issues for investors, as well as questions about how long the trend can continue. Andrew Holt investigates.


The march of share buybacks continues unabated as they grew last year by 22% to a record $1.3trn (£1trn), exceeding the previ- ous record set in 2021, according to Janus Henderson. This though is a trend that goes back further than the past two years. Buybacks worldwide have almost tripled in value in the past decade – highlighting the depth of its growth. Indeed, every region, almost every country and almost every sector have seen buybacks grow strongly.


The biggest jump came in 2018: mainly caused by US technol- ogy companies ramping up their buyback programmes. The consequence of this rapid growth is a significant increase in the importance of share buybacks.


In 2012, globally they were equal to just 52% of dividends, ranging from 3% in emerging markets to 102% in North America. Yet in 2022 the global figure jumped to 94%, ranging from 18% in emerging markets to 158% in North America. By far the biggest contributor to growth in 2022 came from the oil sector, in which companies bought back $135bn (£108.6bn) of their own shares, more than four times as much as 2021. Almost all the oil-sector cash was spent by companies in North America, the UK and, to a lesser extent, Europe.


Big tech, big buybacks Some sector variations are even starker. In the media sector, for example, which includes Facebook owner Meta and Google’s parent company Alphabet, neither company pays a dividend, but both are big buyers of their own shares. The global value of the sector’s share buybacks was eight times larger than the dividends paid in 2022. By contrast, in the high dividend-yielding utilities sector, divi- dends were eight times larger than buybacks. Adding buybacks and dividends together, the so-called total shareholder yield, significantly reduces the differences. As with most market trends, the figures are concentrated in a few companies, always the market behemoths. Apple is one of the world’s largest buyers of its own shares, worth an astonish- ing $89bn (£71.6bn) in its 2022 financial year, almost 7% of the global total.


The 10 largest buyers accounted for almost a quarter of the global total and only one of these, Shell from the UK, was out- side the US. Nestle was one of Europe’s largest buyers of its own shares last year.


6 | portfolio institutional | June 2023 | Issue 124 Shareholder value?


This has led to some investors raising concerns that the prac- tice is boosting senior executive payouts while providing little benefit to shareholders. Euan Munro, chief executive of Newton Investment Manage- ment, has been one dissenting voice. He said that he would prefer share buybacks to be “less prevalent”. Munro notes that share buybacks can be used to “manipulate [earnings per share] numbers upwards” to meet medium-term management incentive targets at the expense of investments that might be important to a company’s long-term health. Of course, this in itself reveals an important motivation of share buybacks: the short-termism of market expectations. In essence, the rise and rise of share buybacks has resulted in massive amounts of company cash being used not to reinvest in the business, or pay conventional dividends, but to buy shares for cancellation. Vartika Gupta, a solution manager at McKinsey, said buybacks offer no value for investors. “Share repurchases are a good way to return cash to those who can invest it better than a company at the limits of investment capacity, for whatever reason. But buybacks don’t fundamentally create value,” she said. A point shared by Ben Lofthouse, head of global equity income at Janus Henderson. “Buybacks cannot always be relied on to enhance shareholder returns.”


And he added that the rapid growth in buybacks in the past three years reflects “a willingness to reward shareholders with- out setting unintended expectations for dividends”.


Getting to zero Simon Rawson, ShareAction’s deputy chief executive, high- lighted another issue connected to the rise of share buybacks, one seldom mentioned: the connection to net-zero commitments. “As the International Energy Agency has highlighted, the amount returned to shareholders [by fossil fuel companies] in the form of dividends and buybacks could have been reinvested to meet our net-zero investment requirements in all clean fuels until 2030,” he said.


Although many investors would see this as problematic, as Rawson is equating buybacks with dividends. And the whole point is that they are not the same – given that buybacks give returns to select shareholders, which breaks the central princi- ple of being an investor. Where does the seemingly never-ending trend of greater buy- backs go from here? One strong reason exists for suggesting the future consists of a buyback slowdown. This is based on the simple fact that the global cost of capital is now significantly higher, suggesting the buyback rise of recent years is not sustainable.


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