UK companies are announcing buybacks on top of buybacks as they strive to boost their struggling share prices. Will it work?
- Barclays, HSBC, Sainsburys, Shell, BP and Unilever are among the companies announcing share buybacks since the start of February
- The UK market now offers the highest total yield – a blend of dividend yield and buyback yield – of any market globally
- The hope is that buybacks can create self-sustaining momentum in UK shares
On 20 February, Barclays announced plans to return £10bn to shareholders over the next three years in dividends and share buybacks. In the same week, HSBC announced £2bn in share buybacks, and Santander £1.5bn. Sainsburys, Shell, BP and Unilever have also announced share buybacks since the start of February.
Ian Lance, manager on the Temple Bar Investment trust, says that almost half of all stocks in the MSCI UK index have undertaken a buyback in the last 12 months. The UK market now offers the highest total yield – a blend of dividend yield and buyback yield – of any market globally. It is now 6.1%, compared to 4.5% in Europe ex UK and just 3.2% for the US.
It is a sign that UK company bosses have given up waiting for an external saviour and decided to take their destiny into their own hands. Many have grown increasingly frustrated with the low valuations afforded to their companies, saying that they don’t reflect the strong operational performance. In the absence of pension funds, retail or foreign investors, they have decided to become the marginal buyer of their own shares.
Share buybacks are often met with scepticism. They can be used to inflate earnings per share to support remuneration targets for management, for example. However, that doesn’t appear to be what’s happening here and most UK fund managers – equally frustrated with the treatment of UK companies – welcome the move.
James Lowan, senior fund manager on the JOHCM UK Equity Income fund, says they should amplify dividend growth, as there are fewer shares for the dividend to be spread across. Nick Shenton, UK Income fund manager at Artemis, says: “Share buybacks work best when a company’s shares are cheap relative to its earnings. And that’s precisely what we see today: the UK stock market is on sale. It trades at one of its lowest-ever valuations relative to both its own history and other stock markets around the world.”
The hope would be that these buybacks will create self-sustaining momentum in the shares. Shenton adds: “The share prices of these companies move up – significantly – when the world takes notice.” This appears to be happening already. Those companies that have announced buybacks have been rewarded with a boost in their share price. Barclays shares, for example, have moved from 140p to 165p within a week.
Investors have been hunting for a catalyst in UK shares: this might just be it.
