Share buybacks face resistance in post-Covid world
Share buybacks already had a dubious reputation before the Covid-19 crisis but that didn’t stop companies purchasing more and more of their own shares in the market.
US companies in the S&P 500 index bought a record $806bn (£652bn) of shares in 2018, fuelled by the Trump administration’s corporate tax cut. Though buybacks eased to $729bn in 2019 the total was still higher than the figure for any year except 2018.
The UK has followed a similar pattern if on a smaller scale. Post-financial crisis buybacks peaked in 2018 at about £36bn before dipping to around £26bn in 2019 - still higher than any other year since 2011, Bloomberg figures show.
Since 2010, FTSE 100 companies have spent about £136bn buying back their own shares. The biggest purchaser was Royal Dutch Shell, which spent about £25bn including £10bn in 2019.
Other big purchasers were miners Rio Tinto and BHP, which both spent more than £17bn, and Unilever, which spent about £13bn, the Bloomberg figures indicate.
But since the eruption of the Covid-19 pandemic, companies have been reversing these decisions by cancelling share repurchases. They are doing so to preserve cash as costs outstrip revenue depleted by economic shutdowns.
From March to 20 April, 20 UK companies scrapped buyback programmes worth £8.6bn with about £5bn left to run, according to figures supplied by AJ Bell.
UK companies halting buybacks included Diageo, which shelved a £4.5bn repurchase programme with £1.25bn completed; Pearson, which put its £350m buyback on hold after buying £167m of shares; and Berkeley, which called off a £455m return of capital including buybacks.
Buybacks return cash to shareholders who choose to sell their shares. They are also meant to increase returns for those who hold the shares by reducing the number of shares in the market.
Critics argue that buybacks increase returns for affluent asset owners compared with employees whose wages have been driven down over decades. They say buybacks also limit investment spending needed for companies and economies to thrive.
Buybacks also help boost the pay of company bosses whose bonuses are paid in shares. They are an important part of the post-financial crisis debate about the purpose of companies and distributions of wealth in society.
The Covid-19 emergency has intensified that debate with low-paid workers at the frontline of saving lives and getting food and other essentials to households. Many companies are taking government assistance such as pay subsidies for employees, tax reductions and cheap loans.
This raises the question: should companies have stashed away more cash instead of spending it on dividends and, particularly, buybacks?
Much of the attention has been on dividends because shareholders tend to expect these payouts. But buybacks, which are more discretionary, are likely to be a bigger casualty of pressure for change after the crisis.
Russ Mould, investment director at AJ Bell, said: "Share buybacks are likely to come under greater scrutiny for several reasons. The most glaring is the number of firms who have run buyback programmes, because they have ‘excess cash,’ only to then take some form of state aid during the crisis.
"Shareholders will at the very least question the value of big share buyback programmes which have in some cases offered little or no support to share prices as soon as the wider markets and economy have hit trouble."
He pointed out that cruise operator Carnival had spent about £2bn buying back shares in 2018 and 2019 only to raise expensive debt secured on its fleet of ships and hold a dilutive rights issue when the coronavirus crippled its business.
Mould said payouts to shareholders were also threatened by a change in public and political opinion, leading to pressure for better pay for workers such as shop and warehouse workers that have helped keep the country functioning.
Analysts at UBS also said shareholder payouts could become less acceptable after the crisis subsides - and that buybacks were most at risk. Even if companies are financially healthy they are likely to face pressure over social inequality, they said.
"Closer scrutiny of social issues may make it more difficult to continue with (or restart) distributions in line with prior practice," Victoria Kalb, a sustainability analyst at UBS, said in a recent note. "If distributions resume, we think dividends could be less controversial than buybacks."
Dividends are seen as strategic whereas buybacks are more short-term and tactical, Kalb said. Buybacks have fewer broader benefits such as providing pension income, which is one of the features of dividends, she said.
"Pre-Covid, buybacks were already under scrutiny particularly in light of widespread issues around inequality. Given the significant social and societal issues raised by the crisis, companies could be under pressure to avoid restarting repurchases."