This year will see a number of FTSE 100 companies complete over £55 billion of share buybacks, according to new research from broker AJ Bell. This is a 300% increase in average buyback amounts that took place during the 2010s. Buybacks are, as the name suggests, a mechanism to allow public companies to purchase their own stock, giving an exit to some shareholders, and increasing the ownership for those remaining. Short-term investors like them. The business press likes them because it’s something to write about beyond the general gloom, and executives seem to like them, perhaps because it’s easier to hit or exceed an earnings per share target if you suddenly have fewer shares. This is a good thing, presumably. But hang on, not so fast.
The fact that FTSE 100 companies are buying back their shares rather than investing in innovation and strengthening their businesses doesn’t exude the much-needed confidence the market needs. This rampant short-termism is a symptom of market failure, not the cure. There are better things to do with a corporate cash pile than give it away.
Globally, share buybacks have risen from $463 billion in 2012 to $1.3 trillion in 2022. We have consistently heard from executives that the future is unpredictable (the very worst scenario for companies – good or bad, they like to know the direction of travel). They respond to this uncertainty by giving billions back to shareholders that they don’t have to give, which should have been invested in a myriad of ways.
Of course, it isn’t buybacks that are bad; it’s the people pulling the trigger on them that are making bad decisions. These executives say they are giving short-term investors what they want, long-term investors a bigger slice of the company, and delivering a higher share price in an unloved London market – how can that be bad? It’s bad because it has about as much analysis behind it as my betting on the number 33 at roulette. Over £60 billion of share buybacks in the UK took place between 2007 and 2009. It did nothing to support share prices during the 2008 financial crisis. This year, HSBC, NatWest, Lloyds, and Barclays will engage in over £11 billion of share buybacks. This is reckless when considering the banking sector's vulnerability to economic shocks and contagion. SVB and Credit Suisse must be very distant memories to these bankers.
This year, Shell and BP buybacks will total over £20 billion in the oil sector. BP, who is completing a £6 billion share buyback, should know better. The company engaged in substantial buybacks between 2005 and 2007. By late 2008, the oil price had dropped from $147 to $35 per barrel. They fared no better in 2014 when they engaged in another buyback before recording a $6.5 billion loss for 2015.
This is the sector that has been hammered for war profiteering amongst a host of other ‘antiplanet’ actions . Rather than demonstrate they are devoid of investment ideas, the leadership of both companies should invest that £20 billion to make a decent return for shareholders fighting climate change with renewable energy projects. As for the banks, why don’t they pass on interest rate rise benefits to savers and stop gaslighting us about why they haven’t done so? (buybacks, perhaps?)
Not all buybacks are bad, particularly for technology companies, but they aren’t blazing the buyback trail in the UK. The increasing trend of share buybacks is an act of corporate cowardice by executives at a time when investment and innovation are needed more than ever.
