The enduring undervaluation of British companies has impacted the market in a number of ways. It has triggered both an exodus of investors, which compounds the problem, and a flood of takeover bids. But it has also been a catalyst in persuading boards that buyback programmes are one way to help lift share prices when factors out of their control are driving them down.
Panmure Gordon says the UK discount stands at 17 per cent to comparable indices on a like-for-like basis, and that’s after the recent strong momentum. If there are too few buy-and-hold investors, and too many opportunistic ones, then it makes sense for businesses to step in and support their own share prices. It’s certainly less drastic than uprooting the company in search of deeper pools of capital elsewhere.
Recent buyback announcements include a £25mn share repurchase plan at Pets at Home, following £100mn of purchases in the past two years; Paragon doubling its current repurchase plan to £100mn; and another £75mn programme at Britvic. Substantially bigger schemes include Unilever’s allocation of €1.5bn for purchases. Shell announced another mega buyback last month, worth $3.5bn, to be completed before its Q2 results announcement at the start of August, and BAT is spending £1.6bn in 2024-25.
Buying back shares is so run of the mill that the Liberal Democrats have even proposed a 4 per cent levy on FTSE 100 buybacks as one of their election policies, which they reckon could raise £1.4bn a year, an idea that might be picked up by the next government.
Activity on this front among beleaguered investment trusts is also at record levels, says Winterflood. Trusts spent £2.2bn on buybacks in the first four months of the year, more than twice the amount spent at the same point in 2023. Last month, Scottish Mortgage bought £311mn-worth of its own shares in a single day as part of its two-year £1bn buyback plan. Pantheon International is another big buyer of its own shares – it committed 14 per cent of its market capitalisation to buybacks in the financial year to 31 May 2024.
Even small caps are getting in on the act, notes manager Mark Niznik at Artemis Smaller Companies Fund. Roughly one in eight smaller companies listed in the UK are buying back their own shares, a level he describes as unprecedented.
But the key question is does this strategy work? And for investors who might prefer dividends, are buybacks eating into these payouts?
Computershare research shows that share buybacks are having an impact on the total amounts being paid out as dividends by pulling them “a little bit lower”. It notes that oil companies, in particular Shell, have shifted the emphasis significantly towards buying back shares. Last year Shell and BP returned almost twice as much capital (£20bn) to shareholders via this route than via dividends (£10.6bn). But the oil majors remain among the UK’s top dividend payers.
In theory, investors can realise their own dividends from buybacks by selling shares from their new higher value holding, and any positive news following the shrinkage in shares in issuance should deliver a greater impact than before. One fund manager recently commented to me how little it takes for prices to shoot up as the number of shares in circulation shrinks, and that he had seen mid-cap shares jumping by 20 per cent in a single day.
Next is a company that has a long history of buybacks, and they have worked well for investors in terms of total returns. Tesco has been buying its own shares but continues to have a dividend yield of 4 per cent.
Niznik says research shows that since 2016, the top 20 per cent of FTSE SmallCap companies by buyback yield – in other words those spending the most on buybacks as a proportion of their market capitalisation – have delivered around twice the total return of the whole index.
The impact on trust discounts is rather more complicated given the range of factors at work, but the evidence suggests that trusts that regularly carry out buybacks to keep their discount within a set range usually achieve their objective, and that buybacks are accretive to NAV.
Buybacks aren’t always the right strategy. Hollywood Bowl is prioritising investment over buying its shares.
But the UK’s listed companies need all the help they can get right now, and if buybacks are the easiest way of providing a floor to price falls then it makes sense for businesses to use them.
