One of the interesting changes in European stock markets since the pandemic is that European and UK companies are significantly increasing their share buybacks. This has all kinds of benefits since it reduces the tax burden for investors (compared to being paid a dividend) and increases EPS growth by reducing the number of shares among which net income is divided.
Brilliant observation. Buybacks might not be legally binding but perhaps if a company announces one it should be legally bound to announce that it has failed to action it.
Very good idea. I think a legally binding announcement every quarter on the progress or at the end of the allocated time would be great.
Here in the UK that is quite common. From INPP 45 minutes ago in their trading update as per 19 June: From the £30m share buy-back programme launched in January 2024 the Company has, to date, bought back c£13m of shares.
Personally I much prefer if we eliminate share buybacks altogether. It seems to me that companies don’t take into consideration the share price when buying back the shares, so it doesn’t seem to me a real value creation for the shareholders. Furthermore, whatever shares are bought back are offset by the shares issued to employees as compensation. Last but not least, it seems to me that share buybacks happen to just artificially goose up per share stats, as a replacement for increasing productivity and value. Overall, the tax benefits seem to be dwarfed by the downsides that aren’t accounted for.
Lots of good points there. Thing is that from a tax perspective, share buybacks are much more efficient to the investor (if they are really done, that is because they result in capital gains, while dividends are taxed as income. And most countries have much higher income tax rates than capital gains tax rates.
Great point Joachim- and I especially agree with your point that what matters is how many shares they repurchase and cancel.
I would argue that you need to look at completion rate through the lens of the share price’s relative cheapness.
What we do not want is companies buying shares back at any price- because buybacks just transfer wealth between the holding and the selling shareholder.
This issue is a real problem when you look at the execution products used to buyback shares. Companies outsource the actual execution process to brokers. Brokers have a range of solutions. The ones that guarantee completion are the ones that extract the most from the process. Can you imagine if companies were charged 8.5% to pay you a dividend? Well I can show you a company paying an 8.5% fee just to buy shares. And I can show you worse- there is a company in the US paying several hundred percent above the spot rate for their shares right now.
And as you say no one is asking the right questions.
Hahaha- love it. I did too- but never on these products I hasten to add.
We need to be careful of what we wish for. 100% completion rate does not necessarily equal the best outcome.
I think Lord Wolfson at Next knows what he is doing. Buybacks work when they generate a higher equivalent return on the capital than the company can generate by deploying it themselves. That rate is share price dependent.
"I would like to interrupt the current post to inform you that we now have reached 58% completion." That gave me a laugh,, thanks. My favorite "buybacks" are when officers buy shares with their own funds. Not enough of that going on nowadays.
I came across the article (https://tinyurl.com/3pd34a4s) on the Buy Back a few days which has made the following observations:
Over the past ten-plus years, 408 S&P 500 companies, or 88%, had a positive return on their buybacks, while only 54, or 12%, had negative returns (those 54 companies spent nearly $417 billion buying back their stock); 38 companies had no buybacks.
Buybacks tend to rise with stock prices. Buying high is the opposite of what corporate finance theory and common sense would tell you (buy-low, sell-high). So, why do companies do it? Stock-based compensation is a key driver. Companies buy back more and more stock as stock prices rise to try and offset the increasing earnings dilution from stock-comp. Of course, those buybacks don’t impact the economic dilution that still takes place.
It looks like this activity generates value in short term in most cases but also increases dilution. With my non-finance background, I think short-term thinking rules again, and this money (or a part of it) can probably be used to achieve better long-term goals rather than boost short-term stock prices.
Personally, I think short-term thinking is definitely at play here. After all, why not buy back shares as a CEO just before your options vest? You get a higher payout from your derivatives portfolio.
Brilliant observation. Buybacks might not be legally binding but perhaps if a company announces one it should be legally bound to announce that it has failed to action it.
Very good idea. I think a legally binding announcement every quarter on the progress or at the end of the allocated time would be great.
Here in the UK that is quite common. From INPP 45 minutes ago in their trading update as per 19 June: From the £30m share buy-back programme launched in January 2024 the Company has, to date, bought back c£13m of shares.
:-D
I'm sending you the 'thank you' note here.
Good point. Buybacks seem to be understudied
Personally I much prefer if we eliminate share buybacks altogether. It seems to me that companies don’t take into consideration the share price when buying back the shares, so it doesn’t seem to me a real value creation for the shareholders. Furthermore, whatever shares are bought back are offset by the shares issued to employees as compensation. Last but not least, it seems to me that share buybacks happen to just artificially goose up per share stats, as a replacement for increasing productivity and value. Overall, the tax benefits seem to be dwarfed by the downsides that aren’t accounted for.
Lots of good points there. Thing is that from a tax perspective, share buybacks are much more efficient to the investor (if they are really done, that is because they result in capital gains, while dividends are taxed as income. And most countries have much higher income tax rates than capital gains tax rates.
As for your point on companies buying back shares without consideration of the share price, I used to think like you but then I saw a piece of research that looked at it in a somewhat different way: https://klementoninvesting.substack.com/p/about-those-share-buybacks
As for buying back shares on one side but issuing tons of new shares on the other that is correct, and I have another post coming up on that in July.
Thank you! The earnings outlook results seem interesting and somewhat supportive of share buybacks. Looking forward to your July post
Great point Joachim- and I especially agree with your point that what matters is how many shares they repurchase and cancel.
I would argue that you need to look at completion rate through the lens of the share price’s relative cheapness.
What we do not want is companies buying shares back at any price- because buybacks just transfer wealth between the holding and the selling shareholder.
This issue is a real problem when you look at the execution products used to buyback shares. Companies outsource the actual execution process to brokers. Brokers have a range of solutions. The ones that guarantee completion are the ones that extract the most from the process. Can you imagine if companies were charged 8.5% to pay you a dividend? Well I can show you a company paying an 8.5% fee just to buy shares. And I can show you worse- there is a company in the US paying several hundred percent above the spot rate for their shares right now.
And as you say no one is asking the right questions.
Mike
Well, I work for a broker, so no comment ;-)
Hahaha- love it. I did too- but never on these products I hasten to add.
We need to be careful of what we wish for. 100% completion rate does not necessarily equal the best outcome.
I think Lord Wolfson at Next knows what he is doing. Buybacks work when they generate a higher equivalent return on the capital than the company can generate by deploying it themselves. That rate is share price dependent.
Stay well
French interest rates are getting iffy. Can't we start buying back gov liabilities? Oh wait...
"I would like to interrupt the current post to inform you that we now have reached 58% completion." That gave me a laugh,, thanks. My favorite "buybacks" are when officers buy shares with their own funds. Not enough of that going on nowadays.
I came across the article (https://tinyurl.com/3pd34a4s) on the Buy Back a few days which has made the following observations:
Over the past ten-plus years, 408 S&P 500 companies, or 88%, had a positive return on their buybacks, while only 54, or 12%, had negative returns (those 54 companies spent nearly $417 billion buying back their stock); 38 companies had no buybacks.
Buybacks tend to rise with stock prices. Buying high is the opposite of what corporate finance theory and common sense would tell you (buy-low, sell-high). So, why do companies do it? Stock-based compensation is a key driver. Companies buy back more and more stock as stock prices rise to try and offset the increasing earnings dilution from stock-comp. Of course, those buybacks don’t impact the economic dilution that still takes place.
It looks like this activity generates value in short term in most cases but also increases dilution. With my non-finance background, I think short-term thinking rules again, and this money (or a part of it) can probably be used to achieve better long-term goals rather than boost short-term stock prices.
Personally, I think short-term thinking is definitely at play here. After all, why not buy back shares as a CEO just before your options vest? You get a higher payout from your derivatives portfolio.