Why are share buybacks on the rise?

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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