If a company buys its own shares and takes them off the market, does it help the equity price rise? And if a lot of companies use this tool, which is known as an equity buyback, can it lift the equity market overall? Some financial commentators we follow claim buybacks are currently one of few forces boosting markets – and without them, equities will lose one of their primary sources of support. The numbers may seem to back up that thinking. European banks bought back a whopping €4.75 billion of their own shares this summer.[i] Zooming out, the world’s largest 1,200 companies bought back €1.25 trillion in 2022 – a 22% increase from the prior year.[ii] But Fisher Investments UK’s reviews of market history show that whilst buybacks can be a positive for equities, they have limited influence on the market’s direction (as 2022 should show, given the buyback boom coincided with negative returns).[iii]
Fisher Investments UK notes that there are several reasons why companies may choose to repurchase their equity. For one, buybacks are a way to return cash to shareholders and an alternative to a dividend payment on this front. Instead of paying out dividends directly to all shareholders, companies will repurchase and retire their shares instead. This returns cash to shareholders not just via the compensation to those who sell to the company, but they consolidate ownership amongst those who remain, meaning future profits are spread over a smaller shareholder base – increasing each investor’s stake in those profits. Why might a company use this method, seemingly more complicated than a cash dividend? In the US as well as many European nations, buybacks can be more tax-friendly than dividends since capital gains tax rates are more favorable than rates on dividend income.[iv] Moreover, buybacks can also offset companies’ equity-based compensation, preventing an increased share count from diluting investors’ holdings. Without buybacks to offset employee equity options, a company’s value would be spread over a greater number of shares, reducing each investor’s stake.
Fisher Investments UK understands why buybacks have a reputation for lifting equity prices directly. Share prices are a product of equity supply and demand, and corporate buybacks reduce outstanding share supply. Basic economic theory states that lower supply amidst constant or rising demand means higher prices. But when you scale buybacks’ impact on total supply, we think it is easy to see their limited influence over markets’ direction. For example, last year’s €1.25 trillion in corporate repurchases – the most in history – represent only around 1.3% of global market capitalization.[v] On a smaller scale, companies in continental Europe spent nearly €140 billion in buybacks throughout 2022 – yet this amounts to roughly 1.4% of the European market as of December 2022.[vi] In Fisher Investments UK’s review, these marginal supply decreases are unlikely to move the needle for equities – there are too many other variables at work.
Furthermore, increased buybacks don’t imply equity strength – and vice versa. Consider 2018 and 2021, when buybacks in continental Europe rose from €68.8 billion to €92.5 billion and €70.7 billion to €164.5 billion, respectively.[vii] European equities underperformed global markets both years.[viii] On the other hand, 2009 saw eurozone equities outperform global equities whilst buybacks in the EU decreased.[ix] This isn’t just a European phenomenon. Consider the S&P 500 Buyback index, which tracks the performance of the top 100 equities with the highest buyback ratios in the US-orientated S&P 500 index.[x] In 2015, the Buyback index fell -6.9% whilst the broader S&P 500 rose 1.4%.[xi] Conversely, the S&P 500 finished 2020 up 18.4% whilst the Buyback index rose just 4.6%.[xii] In Fisher Investments UK’s review, more buyback activity doesn’t automatically mean higher equity prices, nor do fewer buybacks imply falling prices.
Firms might also elect to use cash in ways they think are more productive for their particular business instead of buying back shares. They might view paying dividends as a better way to attract investor demand. Or they may choose to reinvest profits into the business in hopes of boosting long-term earnings, perhaps by allocating more money into research and development or upgrading their facilities and technology. Larger companies might even use cash for mergers and acquisitions. In our experience, investors may view any or all of these actions as better for shareholders in the long run than buybacks.
Whilst Fisher Investments UK does factor in buybacks when gauging the equity market’s fundamentals, we think they are best viewed in concert with all the other factors that contribute to equity supply and demand – and the extent to which investor sentiment seems to appreciate these factors.
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Disclaimer:
This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square (NYSE:SQ), Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
[i] “European Banks Unleash $5 Billion in Buybacks on Rates Boost,” Steven Arons, Bloomberg, 28/7/2023. Accessed via Yahoo! News UK.
[ii] “Global Share Buybacks Surge to a Record $1.31 Trillion Almost Equalling Dividends,” Janus Henderson, April 2023.
[iii] Source: FactSet, as of 4/10/2023. Statement based on MSCI World Index returns with net dividends, 31/12/2021 – 31/12/2022.
[iv] Source: US Tax Foundation, as of 4/10/2023. Statement based on 2023 capital gains and dividend tax rates across the US and several European nations.
[v] Source: Note ii and World Federation of Exchanges, as of 4/10/2023. Statement based on market capitalisation of listed domestic companies, December 2022. Market capitalisation is a measure of a firm or index’s size calculated by multiplying its share price by the number of shares outstanding. In this case, it is the combined value of all global equity exchanges.
[vi] Source: Note ii and Federation of European Equity Exchanges, as of 16/10/2023. Statement based on Europe ex UK share buybacks in 2022 as a percentage of the combined value of 15 major European equity exchanges in December 2022.
[vii] Source: Note ii and FactSet, as of 4/10/2023. Statement based on Europe ex UK share buybacks, MSCI World Index returns with net dividends and MSCI Europe ex UK Index returns in EUR, 31/12/2017 – 31/12/2022.
[viii] Ibid.
[ix] Source: FactSet, as of 4/10/2023. Statement based on MSCI EU and MSCI World Index returns with net dividends in EUR, 31/12/2008 – 31/12/2009 and “Short-Termism, Shareholder Payouts, and Investment in the EU,” Jesse M. Fried and Charles C.Y. Wang, ECGI Working Paper Series in Law, February 2021.
[x] A buyback ratio is calculated by dividing the amount of cash a company pays buying back its equity divided by its market capitalisation at the beginning of a buyback period.
[xi] Source: FactSet and S&P Global, as of 4/10/2023. S&P 500 and S&P 500 Buyback Index price return, 31/12/2014 – 31/12/2020. Presented in US dollars. Currency fluctuations between the dollar and the pound may result in higher or lower investment returns.
[xii] Ibid.