Economic recovery powers a boom in share buybacks

After better-than-expected first-quarter results, US firms are buying back their own shares at the fastest rate in over 20 years.

“We’re buying back stock because our cup runneth over,” JPMorgan Chase’s chief executive Jamie Dimon told investors last month, before announcing a “$30bn share-repurchase plan”, says Caitlin McCabe in The Wall Street Journal. The bank is not unusual. After slashing payouts to preserve cash last year, many blue-chips are swimming in greenbacks. The money is now heading for “shareholders’ pockets”. US firms have already announced $504bn of share buybacks so far this year. That is the fastest pace “in at least 22 years”. The first quarter also brought the fastest quarterly rise in dividend payouts since 2012. 

The buyback surge is being powered by “blowout first-quarter” results on both sides of the Atlantic, say Aziza Kasumov and Siddharth Venkataramakrishnan in the Financial Times. Firms in the Stoxx Europe 600 index are on course to achieve year-on-year earnings growth of 90%.

Share repurchases are attractive to companies that are flush with cash, but uncertain about the future. Dividend hikes can be difficult to reverse if business conditions worsen. Buybacks, by contrast, can be used “more opportunistically” when a firm has cash to spare.  

The FTSE is enjoying its own “buyback bonanza”, says Jim Armitage in the Evening Standard. Big UK firms have announced more than £8bn in buybacks so far this year, according to data from AJ Bell. In theory, this should deliver capital gains to shareholders, but that’s not guaranteed: BP is “a buyback champion”, but you wouldn’t think so from its share price recently. That’s why critics see buybacks as “financial engineering”. When management can think of nothing better to do with extra cash than to buy the company’s own shares, it can be a sign that a firm is operating in a “boring, low-growth industry”.

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