In my first post every year, I emphasise that I won’t write about theories by Nobel Prize-winning economists, but instead focus on what happens in the real world.
While I'm fully on board with the fact that buybacks create buying pressure and thus likely a higher share price, I would run away from any company doing buybacks "to support/increase the share price" as their stated goal.
I used to think the same way, but having worked in UK markets for the last six years I think there is some wisdom to it in markets that otherwise suffer from a significant lack of liquidity like the UK. Also, there is some evidence (that I am still not fully on board with) that buybacks are not entirely a waste of money for the company management: https://klementoninvesting.substack.com/p/about-those-share-buybacks
buybacks are not unlike any other important action where management needs competence (e.g., operations, hiring,etc...). it is obviously a terrible decision in a declining business...negative compounding.
despite all the reams of writing on warren buffett, he really had only 3 principles:
a. make a high probability decision for major initial investments
b. manage risk
c. do buybacks only below a threshold, and never dividends
Interesting piece- thoughtful as usual -thanks againJoachim.
One aspect that often gets overlooked, especially in the UK, is how buybacks are actually implemented. Just like all "investment" or "strategy" decisions - execution is critical to outcome.
The UK market give near‑perfect real time information leakage around corporate buyback execution - see the daily RNS feed. This increases the probability that a substantial part of the economic value of a buyback is captured by intermediaries and liquidity providers rather than by long‑term shareholders - partially explains UK revenue growth for XTX, Jump, Jane Street, HRT, Virtu, Citadel Sec etc etc
The long‑run drag from systematically paying the street to front‑run and warehouse this buyback flow may well outweigh the short‑term price impact that the Grinold–Kahn‑style rules or the Gabaix–Koijen estimates focus on.
Each markets disclosure rules, execution strategies employed and market microstructure matter at least as much as the headline notional: the more the market knows about the buyback schedule, urgency, venue usage etc the more of the ‘buyback alpha’ leaks away before it reaches the ongoing shareholders.
This "information leakage" cost is the reason large institutions keep their order flow and its execution confidential...
The US is a much more "efficient" market than the UK for issuers to implement share buybacks ... in part this explains why UK listed companies continue to be priced at discounts to their global peers.
UK capital market "primary flow" (ie capital flowing between investors and issuers) over the last two years IPOs c £3bn, buybacks c £115bn.
Note a higher proportion of MSCI UK issuers did a buyback last year than any other country index.
Completely agree with you about the leakage due to the transparency about buybacks in the UK. But to change that, we need regulatory change.
As for the commonality of buybacks in the UK that is a post-pandemic phenomenon. Before the pandemic buybacks were much rarer in the UK than in Europe, let alone the US. But due to the extremely bad performance of the market post-pandemic, more and more UK companies have started to buy back their shares. so now they are roughly in line with the US and continental Europe in terms of buyback yield.
Agree re post-pandemic move by UK issuers towards more buybacks. To your first point, if we want them to be effective we need to help/encourage the UK regulators to make some changes.
Over the summer last year the FCA's wholebank bank supervision team did publish a review on how banks carry out buyback execution on behalf of issuers. Within that review the supervision team suggested that revising some of the disclosure rules might be beneficial, but that this was in the FCA policy teams remit not their.
On the surface the wholebanks review essentially said brokers adequately disclose the risks within their share buyback execution products... the FCA went on to then explicitly discuss some of the risks.. the net effect of this review I think is that the FCA punted the execution structure problems to issuer governance and the FRC.
In Sept the FCAs CP25/24 quarterly report proposed a minor change in disclosure rules, which I think is a step in the right direction.
My point is that the FCA seem to be open to feedback and engagement on this topic- the more investors and stakeholders engage on this topic, the more likely we are to get some changes made.
Buybacks are one of the logical solutions to narrowing any price to valuation discounts in the UK- but they will only work if they can be executed efficiently.
It would be great if you could use your platform to engage investor more on this topic. I would be very happy to help you in any way I can.
Unfortunately, when it comes to pushing a regulatory or political agenda, I cannot do that on this platform. The reason is simply that my employer allows me keep writing here as long as don't make money (because that would cannibalise my employer's revenues), don't talk about individual stocks (for compliance reasons, since I am a regulated person), and don't talk about 'what should be done' in the regulatory space because that may contradict my employers' views.
It's the price to pay so I can keep in touch with the many smart readers I have around the world, like you. And I find these requests from my employer totally reasonable to avoid conflicts.
That is very sensible and fair of your employer - more should think that like!
When I said "your platform" I actually meant via your employer rather than here. I think it would be a very good way for your employer to position itself with investors and issuers from the perspective of UK IPOs and UK Capital Market Competitiveness. My email is mseigne@candorpartners.net if you would like to discuss?
No problem at all if no interest.
Love your work on this platform- thank you for sharing your thoughts- I read pretty much every one of them. Happy New Year.
Yes, there is a tax advantage to buybacks over dividends in most countries. Yet, in countries like the UK and many European countries, buybacks have not been very popular in t he past despite this tax advantage. But things are changing...
I assumed that the increase in price was due to the impact on earnings per share on the reduced share count. It is a new to me concept that it is due to buying pressure. But, then once the buying is over does the price go down or does the improved EPS sustain it?
Improved EPS should sustain it. But be aware that buybacks are a constant trickle over the buyback period. It's not that a company goes into the market and buys back several billion worth of its shares in a couple of days. Rather, they buy 10% of daily volume each day for a year or so.
Assuming the market values cash on the B/S at par and the stock is priced “correctly”, the lower cash should exactly offset the lower share count such that the value per share, at the instant they’re bought, does not change. Rather, the increase in value per share already happened, as they accumulated that cash.
Of course if shares are undervalued, then buybacks immediately create value.
I think of buybacks as management trading on my behalf. I could choose to sell out as they buy back shares, holding my % constant; just as I could choose to reinvest dividends, turning them effectively into buybacks. Tax aside, the two are the same. BUT by letting management choose which to do, I allow them to express an opinion on the value of the stock, and assuming I trust management’s judgement, I can generally assume their estimate will be better than mine, and therefore I will benefit over time by them buying back shares when the stock is undervalued, and paying cash divs when it’s overvalued.
Of course in reality, most managers just buy back shares when earnings are good and multiple are high.
Love your stuff. Keep writing!
While I'm fully on board with the fact that buybacks create buying pressure and thus likely a higher share price, I would run away from any company doing buybacks "to support/increase the share price" as their stated goal.
I used to think the same way, but having worked in UK markets for the last six years I think there is some wisdom to it in markets that otherwise suffer from a significant lack of liquidity like the UK. Also, there is some evidence (that I am still not fully on board with) that buybacks are not entirely a waste of money for the company management: https://klementoninvesting.substack.com/p/about-those-share-buybacks
buybacks are not unlike any other important action where management needs competence (e.g., operations, hiring,etc...). it is obviously a terrible decision in a declining business...negative compounding.
despite all the reams of writing on warren buffett, he really had only 3 principles:
a. make a high probability decision for major initial investments
b. manage risk
c. do buybacks only below a threshold, and never dividends
Interesting piece- thoughtful as usual -thanks againJoachim.
One aspect that often gets overlooked, especially in the UK, is how buybacks are actually implemented. Just like all "investment" or "strategy" decisions - execution is critical to outcome.
The UK market give near‑perfect real time information leakage around corporate buyback execution - see the daily RNS feed. This increases the probability that a substantial part of the economic value of a buyback is captured by intermediaries and liquidity providers rather than by long‑term shareholders - partially explains UK revenue growth for XTX, Jump, Jane Street, HRT, Virtu, Citadel Sec etc etc
The long‑run drag from systematically paying the street to front‑run and warehouse this buyback flow may well outweigh the short‑term price impact that the Grinold–Kahn‑style rules or the Gabaix–Koijen estimates focus on.
Each markets disclosure rules, execution strategies employed and market microstructure matter at least as much as the headline notional: the more the market knows about the buyback schedule, urgency, venue usage etc the more of the ‘buyback alpha’ leaks away before it reaches the ongoing shareholders.
This "information leakage" cost is the reason large institutions keep their order flow and its execution confidential...
The US is a much more "efficient" market than the UK for issuers to implement share buybacks ... in part this explains why UK listed companies continue to be priced at discounts to their global peers.
UK capital market "primary flow" (ie capital flowing between investors and issuers) over the last two years IPOs c £3bn, buybacks c £115bn.
Note a higher proportion of MSCI UK issuers did a buyback last year than any other country index.
Completely agree with you about the leakage due to the transparency about buybacks in the UK. But to change that, we need regulatory change.
As for the commonality of buybacks in the UK that is a post-pandemic phenomenon. Before the pandemic buybacks were much rarer in the UK than in Europe, let alone the US. But due to the extremely bad performance of the market post-pandemic, more and more UK companies have started to buy back their shares. so now they are roughly in line with the US and continental Europe in terms of buyback yield.
Agree re post-pandemic move by UK issuers towards more buybacks. To your first point, if we want them to be effective we need to help/encourage the UK regulators to make some changes.
Over the summer last year the FCA's wholebank bank supervision team did publish a review on how banks carry out buyback execution on behalf of issuers. Within that review the supervision team suggested that revising some of the disclosure rules might be beneficial, but that this was in the FCA policy teams remit not their.
On the surface the wholebanks review essentially said brokers adequately disclose the risks within their share buyback execution products... the FCA went on to then explicitly discuss some of the risks.. the net effect of this review I think is that the FCA punted the execution structure problems to issuer governance and the FRC.
In Sept the FCAs CP25/24 quarterly report proposed a minor change in disclosure rules, which I think is a step in the right direction.
My point is that the FCA seem to be open to feedback and engagement on this topic- the more investors and stakeholders engage on this topic, the more likely we are to get some changes made.
Buybacks are one of the logical solutions to narrowing any price to valuation discounts in the UK- but they will only work if they can be executed efficiently.
It would be great if you could use your platform to engage investor more on this topic. I would be very happy to help you in any way I can.
Unfortunately, when it comes to pushing a regulatory or political agenda, I cannot do that on this platform. The reason is simply that my employer allows me keep writing here as long as don't make money (because that would cannibalise my employer's revenues), don't talk about individual stocks (for compliance reasons, since I am a regulated person), and don't talk about 'what should be done' in the regulatory space because that may contradict my employers' views.
It's the price to pay so I can keep in touch with the many smart readers I have around the world, like you. And I find these requests from my employer totally reasonable to avoid conflicts.
That is very sensible and fair of your employer - more should think that like!
When I said "your platform" I actually meant via your employer rather than here. I think it would be a very good way for your employer to position itself with investors and issuers from the perspective of UK IPOs and UK Capital Market Competitiveness. My email is mseigne@candorpartners.net if you would like to discuss?
No problem at all if no interest.
Love your work on this platform- thank you for sharing your thoughts- I read pretty much every one of them. Happy New Year.
Honestly, that is above my pay grade in my employer 😀
Isn't it the tax issue that makes it lucrative in many countries instead of dividends?
Yes, there is a tax advantage to buybacks over dividends in most countries. Yet, in countries like the UK and many European countries, buybacks have not been very popular in t he past despite this tax advantage. But things are changing...
I assumed that the increase in price was due to the impact on earnings per share on the reduced share count. It is a new to me concept that it is due to buying pressure. But, then once the buying is over does the price go down or does the improved EPS sustain it?
Improved EPS should sustain it. But be aware that buybacks are a constant trickle over the buyback period. It's not that a company goes into the market and buys back several billion worth of its shares in a couple of days. Rather, they buy 10% of daily volume each day for a year or so.
Assuming the market values cash on the B/S at par and the stock is priced “correctly”, the lower cash should exactly offset the lower share count such that the value per share, at the instant they’re bought, does not change. Rather, the increase in value per share already happened, as they accumulated that cash.
Of course if shares are undervalued, then buybacks immediately create value.
I think of buybacks as management trading on my behalf. I could choose to sell out as they buy back shares, holding my % constant; just as I could choose to reinvest dividends, turning them effectively into buybacks. Tax aside, the two are the same. BUT by letting management choose which to do, I allow them to express an opinion on the value of the stock, and assuming I trust management’s judgement, I can generally assume their estimate will be better than mine, and therefore I will benefit over time by them buying back shares when the stock is undervalued, and paying cash divs when it’s overvalued.
Of course in reality, most managers just buy back shares when earnings are good and multiple are high.