Buybacks work like a charm in the UK

As UK stocks continue to trade at extremely cheap valuations, two investor groups are taking advantage. Private equity companies are picking up high-quality listed companies (particularly in the small and mid-cap space) at bargain prices, and companies themselves are increasingly buying back their own shares. In the FTSE 100 large-cap index, approximately two-thirds of companies engage in share buybacks in any given year, while in the FTSE 250, the share of companies buying back their shares has increased from 42% in 2014 to 56% in 2024. The rise in buyback activity is even stronger for companies listed on the AIM exchange.

Share of listed companies buying back shares

Source: Panmure Liberum, Bloomberg

There is a lively debate about whether share buybacks work. The basic idea is that as a company buys back shares, earnings per share increase even if net profits stay the same. And higher earnings per share should warrant a higher share price. On the other hand, income-oriented investors argue that simply paying dividends is a better way to return cash to shareholders since companies may be bad at timing their buybacks and destroy shareholder value if they buy back shares that are too expensive, or the effect evaporates within the usual market noise.

In the past, I have written about how corporate executives are pretty good at timing their share buybacks, but I have also warned that investors shouldn’t believe every corporate share buyback announcement.

Now, I have come across a simple way to test if companies in the UK (or rather, their brokers that execute the buybacks) are effective at buying back their shares: Look at the regulatory announcements of buybacks.

In the UK, companies typically release an announcement at 7am (i.e. before markets open) a note how many shares they have bought back the previous day and at what price. Dimitris Andriosopoulos tested whether these announcements matter or if they are just another piece of regulation that spams our mailboxes. According to his analysis, these announcements matter a great deal. So much so that there are profitable trading strategies based on these announcements.

Below is a chart of the liquidity impact (measured as bid-ask spread) from the companies buying back their shares. The left chart shows the days around any individual share buyback announcement of a company listed on the London Stock Exchange, while the right chart shows only companies that have not bought back shares in the previous two trading days (i.e. they have bought back only every three days or less). As you can see on the right, liquidity increases quite substantially, not just on the day of the buybacks, but for the two weeks after a buyback. The fact that in the left-hand chart there is no reduction in bid-ask spreads is owed to the fact that if companies buy back shares every day, the bid-ask spread remains persistently low, i.e. there is no compound effect of share buybacks on several days in a row. But buybacks definitely increase stock liquidity.

Change in bid-ask spreads around share buybacks

Source: Andriosopoulos (2025)

But it gets even better. The study provides direct evidence that buybacks increase share prices. Here is the abnormal share price return of companies that buy back shares compared to the FTSE All-Share market benchmark. As you can see, the daily excess return in the days and weeks following a buyback announcement ranges between 0.1% and 0.5% (0.005 in the chart). Of course, the transaction costs of such a trading strategy are huge, so the study also looks at trading strategies with three- to twenty-day holding periods and finds that before transaction costs, these strategies would still offer outperformance between 7% and 50% per year.

Abnormal returns around share buybacks

Source: Andriosopoulos (2025)

I am sceptical that this kind of outperformance would survive after transaction costs are taken into account, but this study shows something very clearly:

• Buybacks make a lot of sense, and they actively boost share prices and stock market liquidity.

• Compared to dividends, the study reports that buybacks are just as effective, if not more so.

• Company executives in the UK have skill in determining buybacks.

• The traders at the brokers that execute those buybacks are the unsung heroes, because they significantly add value to a company’s market cap because of their timing and execution skills.