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2023 share buybacks: activity continues to rise outside of the US

We examine what's driving the trend for share buybacks, why buybacks divide opinion and what they mean for investors.

13/02/2024
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Authors

Harry Goodacre
Strategist, Strategic Research Unit

The use of share buybacks outside the US in 2023 continued to be much more widespread than in recent history. The proportion of large UK firms buying back their shares was extremely high relative to historic levels, even if activity slipped slightly on 2022 levels. And elsewhere, their prevalence continued to increase among large Japanese, French, and German companies.

The US has historically been streets ahead of other markets when it comes to buyback activity. That gap is narrowing.

Buyback activity will always fluctuate over time, and we shouldn’t necessarily interpret the past two years as being a trend for the future. But as a tailwind for equity demand and a mechanical boost for earnings per share numbers, their increased popularity outside the US is worth keeping an eye on.

Why buybacks are a divisive subject

Share buybacks divide opinion. On the one hand, they are a way for company management to return excess cash to shareholders in a way that is less binding in the long term than a dividend increase. And they can be more tax efficient for investors as capital gains are often taxed at a lower rate than income.

On the other hand, they can be criticised for being open to manipulation by management. The same earnings divided by a smaller number of shares leads to an increase in earnings “per share”. If executive remuneration is naively linked to earnings per share growth this could be enriching management at the possible expense of shareholders.

Some also argue that they are a way for management to prop up an ailing share price, again potentially to boost their compensation. But the counter-view is that if management believe their shares to be undervalued then this would be the best time to buy back their shares.

An increase in buybacks may also signal an absence of profitable investment opportunities for the company concerned. So, rather than a positive, they could be interpreted by investors as a negative.

One indication of the strength of feeling about buybacks is that US policymakers have introduced a “buyback tax”, forcing companies to pay tax amounting to 1% of the value of any buybacks. This came into effect on 1 January 2023.

Use of share buybacks outside the US remained widespread in 2023

Based on our calculations, 38% of large US companies bought back at least 1% of their shares during 2023 (net of any shares that were issued). This is down on 2022 levels and is slightly below the average of the three years before Covid (buyback activity dropped dramatically in 2020, distorting any calculations encompassing this period).

For the second year running, large UK companies almost matched the US on this basis last year (Figure 1). This is a major departure from previous norms. US buyback activity previously far outstripped any other major market. Furthermore, the proportion of UK companies doing larger amounts of buybacks is actually higher than the US. 13% of large UK companies bought back at least 5% of their shares last year compared with 9% in the US.

The trend of increasing buyback activity among Japanese, French, and German companies which has been in place for a number of years continued in 2023. The level is lower but the gap is narrowing. Activity remains limited in emerging markets.

In Japan’s case, many companies are valued at less than the book value of their shares and are hoarding cash. With regulators keen to see improvements in firms’ capital efficiency, buybacks can be considered one effective use of that cash, especially if shares can be bought back at a cheap valuation (Japanese shares have hit 33-year highs – but why).

To the extent non-US buyback activity continues strongly, US companies will see a smaller advantage compared to other regions when it comes to equity demand and their earnings per share numbers.

Figure 1: Buybacks activity outside of the US remained widespread in 2023

Proportion of large companies which reduced their number of shares by at least 1%

Buybacks activity

Change in number of shares estimated based on change in market capitalisation/price ratio for each index constituent (based on the full market cap capitalisation of each constituent). This avoids any disortions from share splits etc. Using a larger threshold than 1%, e.g. 5%, would not have materially altered the conclusions from this work. Likewise with a smaller 0.5% threshold. Data as at 29 December 2023.

Source: LSEG Datastream and Schroders calculations.

Buybacks are less common among smaller companies

Perhaps intuitively, smaller companies are less likely to engage in buyback activity and more likely to issue new shares than larger companies. Smaller firms are typically growing quicker and so potentially need the extra capital. This may also explain why emerging market companies have been less keen on buybacks.

We can see this effect by comparing the proportion of large cap companies buying back 1% of their shares (net of any issuance) with the proportion of the overall market doing so (Figure 2). And the same analysis based on the proportion increasing their share count by 1%.

For example, there are 609 companies in the MSCI USA index but 2,400 companies in the MSCI USA Investible Market Index. The difference between these two indices is the inclusion of 1,791 small and mid cap companies, which make up 75% of the total. In all major markets the number of small and mid cap companies far outweighs the number of large companies.

Continuing with the US as an example, 38% of large US companies bought back at least 1% of their shares in 2023 compared with 28% of the broader corporate universe. In contrast, 17% of large US companies increased their share count by at least 1% compared with 31% of the broader corporate universe. This difference in behaviour between large companies and the broader market holds across other markets.

Figure 2: Smaller companies are less likely to do buybacks and more likely to issue new shares

Chart 1 (left-hand side): Proportion of large companies which reduced their number of shares by at least 1% in 2023

Chart 2 (right-hand side): Proportion of large companies which increased their number of shares by at least 1% in 2023

Smaller companies are less likely to do buybacks and more likely to issue new shares

Change in number of shares estimated based on change in market capitalisation/price ratio for each index constituent (based on the full market cap capitalisation of each constituent). This avoids any disortions from share splits etc. Using a larger threshold than 1% e.g. 5% would not have materially altered the conclusions from this work. Likewise with a smaller 0.5% threshold. Indices used for large caps are: MSCI USA, MSCI UK, MSCI Japan, MSCI France, and MSCI Germany. Indices used for large+mid+small caps are: MSCI USA IMI, FTSE All-share, Topix, CAC, CDAX. Data as at 29 December 2023.

Source: LSEG Datastream and Schroders calculations.

Buybacks and “de-equitisation”

There’s been much commentary around the shrinking pool of investable public equities in recent years. One way this happens is when more companies leave the market through de-listings (mainly down to mergers and acquisitions) than join through new listings/initial public offerings (IPOs). (Read more: How should investors respond to the stock market’s dwindling status).

But buybacks also remove equity from the public markets. By carrying out a similar calculation to that used above but applying it to the stock market rather than individual companies, we can get a sense of the scale of this “de-equitisation” trend. Unlike the previous analysis which focussed on net buybacks alone, this captures the combined effect of net buybacks and new entrants/delistings. We refer to this as “net equity supply”. Our analysis is based on the broad stock market of large, mid, and small companies in each country to remove any distortions from companies being promoted/demoted from one size segment to another. For the same reason we focus on individual countries rather than regions. The aim here is to capture only genuine changes in equity supply.

In the 12 months to December 2023, net equity supply was negative in the US, UK, Japan, France, and Germany (Figure 3). However, what is most striking is that the pace of de-equitisation has recently been greater in non-US markets than in the US. Mergers and acquisitions explain some of this. For example, UK companies have traded at a discount to US companies, making them attractive acquisition targets by both US companies and private equity (Read more: Are overseas takeovers a threat to the UK stock market?).

With non-US companies continuing to be valued at steep discounts to their US peers, their appeal as takeover targets is unlikely to wane.

Figure 3: Implied shares count has been declining in all major developed equity market

Rolling 12-month changes in implied number of shares outstanding

Implied shares count

Change in number of shares estimated based on change in market capitalisation/price ratio for each market (based on the full market cap capitalisation not only the free float). Based on MSCI USA IMI, FTSE All-share, Topix, CDAX, and CAC All-share stock market indices. Data as at 29 December 2023.

Source: LSEG Datastream and Schroders Calculations.

Conclusions

While much focus has been on the declining number of listed companies, we shouldn’t forget the contribution of share buybacks to the trend of de-equitisation. For a second year running, use of share buybacks outside the US has been much more common than in the past, and that’s despite a higher interest rate environment. It will be interesting to see if this continues in the years ahead. With a return to an extremely low interest rate environment viewed unlikely, and a continuing weak growth outlook, firms have a lot to consider. They’ll be working out how to use any excess cash, the extent to which their equity prices look cheap, and whether the flexibility of buybacks is more attractive than dividends in an uncertain environment.

Corporate buying, whether through buybacks or mergers and acquisitions, has the potential to support share prices. For investors, the increased popularity of buybacks outside of the US will be a trend to watch. And, so long as non-US companies continue to trade at large valuation discounts to their US peers, they are likely to feature prominently on lists of potential takeover targets.

Authors

Harry Goodacre
Strategist, Strategic Research Unit

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