Why are share buybacks on the rise?

"The Gherkin" and skyscraper of London City, high angle view, England, UK

(Image credit: Alexander Spatari)

published 5 July 2024

Global dividend payouts hit a first-quarter record of $339.2 billion in the first three months of the year, according to the Janus Henderson Global Dividend index. UK dividend growth, however, was “relatively pedestrian”, says Andrew Jones of Janus Henderson.

Dividends rose 2.4% on an underlying basis to $15.3 billion. Ordinary (ie, not special, one-off payments) dividends are forecast to come in at £79.7 billion this year, still 6.5% below the all-time high of £85.2 billion paid out in 2018, says Russ Mould of AJ Bell.

Brexit, the pandemic and surging inflation have all taken their toll on UK plc. Instead, buybacks are growing in popularity. The FTSE 100’s forecast ordinary dividend yield is 3.8% this year, but that rises to 5.3% when you factor in buybacks already announced.

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Buybacks are more flexible for boardrooms than dividends, notes James Gard for Morningstar. As Paul Schultz of the University of Notre Dame puts it, a dividend reflects “a company’s capital discipline, its respect for small investors, and its prudence”. But many British blue chips slashed payouts during Covid – there was a 44% drop in 2020 compared with 2019.

While understandable, trust in promises, once broken, can be difficult to restore. “Share buybacks are more prevalent in the UK than we’ve ever seen before,” Nick Shenton of Artemis Income tells Hargreaves Lansdown. Since the start of 2021, BP has reduced its share count by 17%; Barclays is down 14%.

A common argument for buybacks is that the shares are undervalued. True, “asking a company’s CEO whether their shares are undervalued is akin to enquiring of your local car dealer whether it’s time for an upgrade – you shouldn’t expect an unbiased opinion”. But with British shares trading at historically low levels, this time “we are inclined to agree with the CEO”.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.