Why are UK companies like Natwest using share buybacks more?
UK company buybacks totalled £18bn between 2012 and 2019, but by 2022, that number was over £50bn.
In February, Natwest started a £300m share buyback programme, and has bought back over 20 per cent of its shares since 2020.
Historically, the US has been more of the home of the buyback, with the UK preferring to issue dividends instead, but in the last couple of years, UK companies have been far more open to the practice.
UK companies bought back an average of £18bn in stock a year between 2012 and 2019, but by 2022 that number was over £50bn.
This has been at the same time as keeping their dividends, not simply replacing them with buybacks.
This isn’t just large companies doing this. IG Group has a dividend yield of 6.4 per cent, while also having bought back 7.5 per cent of its stock last year.
Meanwhile, OneSavings Bank yields 8.7 per cent, and bought back 8.5 per cent of its stock in 2023.
The practice also seems to be quite different to the US, rather than a price-insensitive corporate route, this is purposeful large buybacks.
Why has this began? Mainly because the UK is so cheap.
“I think UK corporates are recognising that their stock is cheap, so they can try and take advantage and buy back their own cheap stock while the rest of the world isn’t really watching,” said Alan Dobbie, manager of the Rathbone Income fund.
The UK stock market is very cheap when compared to, say, the American one, and has been for some time. The FTSE is currently trading at a price to earnings ratio of 16.4, compared to an S&P 500 ratio of 28.5.
“When a company’s stock is so cheap, it can make quite a lot of sense to buy back their own stock,” Dobbie added.
Dobbie described the method as a “catalyst for the UK valuation gap to start to close,” but added that it wasn’t “the whole answer”.
In addition, he noted that buybacks are more flexible than ordinary dividends, because they can be “switched on and off”.
If a company cancels its dividend, it can attract significant negative media attention and backlash from shareholders, unlike buybacks.
“Companies are always going to be loath to cut their ordinary dividend, whereas the buyback can be increased or reduced,” he said.
However, buybacks have been controversial in the past, as they can be pursued by executives to increase their pay if it is performance based.
Fears have also been raised that companies will forgo pursuing long term investment, instead putting any excess cash towards bringing their stock price up.
Shell and BP have been two companies that have been particularly criticised, given that last year they rolled back plans to invest more in low-carbon products, while also buying back around 15 per cent of their stock each.
