The debate over the rights and wrongs of BP’s bumper profits will run and run but, from the narrow perspective of investment, the oil major’s latest share buyback means FTSE 100 members are on track to return record amounts of cash to their shareholders in 2022.
A forecast aggregate dividend pay-out of £85 billion almost matches 2018’s peak of £85.2 billion and share buybacks are now firmly on track to set a new record, with £46.9 billion already announced or implemented for this year. That breezes past the prior peak of £34.9 billion, also set in 2018.
Source: Company accounts. *2022 based on announcements to date
Thirty-four members of the FTSE 100 have announced or carried out share buybacks in 2022 to date.
BP’s $3.5 billion second-quarter plan supplements outlays of $1.6 in Q1 and $2.3 billion in Q2 and catapults the firm into second place in terms of this year’s buyback announcements by FTSE 100 firms. It also cements the oil and gas sector’s position at the top of the buyback charts, as ranked by industrial sector.
|Ten largest FTSE 100 firms for share buybacks||Share buybacks by sector|
|Share buybacks (£ billion)||2022||Share buybacks (£ billion)||2022|
|Shell||11.3||Oil & Gas||17.3|
Source: Company accounts
This buyback largesse complements analysts’ forecasts for aggregate ordinary dividend payments from the FTSE 100 of £85 billion. NatWest has also just declared a £1.7 billion in special dividends. Combined, they equate to a forward dividend yield of 4.2% on the FTSE 100 and the buybacks add a further 2.3% to that, to take the cash yield from the FTSE to 6.5% (or £134 billion in forecast cash returns).
Source: Company accounts, Marketscreener, analysts' consensus forecasts
That may provide some succour to patient investors who are looking at a broadly flat capital return from the FTSE 100 in the year to date, although even that is the second-best performance among major indices in the world in 2022 far, trailing India’s equally modest gains, in local currency terms.
Those planned cash returns may therefore be helping to persuade investors to stick with UK equities rather than look elsewhere. Although there always remains the danger that buyback plans are revised and dividend forecasts prove over-optimistic, should a recession or another unexpected development strike.
Buybacks are particularly subject to revision, as there is far less stigma when a management team quietly parks a programme compared to when a boardroom has to sanction a dividend cut.
In 2020, FTSE 100 firms returned £10.2 billion to their shareholders via buybacks but scrapped plans for a further £10.3 billion as the pandemic spread, lockdowns were imposed and the globe plunged into a recession, to the great detriment of corporate profits, cash flow and, in some cases, balance sheets.
Cynics will also flag how buybacks tend to be pro-cyclical. Buyback activity reached its high in 2006-07, as animal spirits were running most strongly just before the Great Financial Crisis swept the world. Over £60 billion in buybacks across those two years did nothing to support share prices in 2007-09 and buybacks slowed to just £3 billion in 2009 by the time the crisis was passing, and equity markets had collapsed and thus become much cheaper.
Buybacks reached their next zenith in 2018 as activity peaked that year. So management teams’ record of buying high rather than low may give some investors pause for thought as to whether buybacks are a potential contrarian indicator, especially considering global equities’ late spring and early summer stumble.
BP’s own track record here is not great. It’s last major buyback spree, of 2005-07, ran slap into the Great Financial crisis and a collapse in the oil price from $147 to $35 by late 2008, while 2014’s buyback was followed by a two-year swoon in the price of crude from over $100 a barrel all the way down to $28.
Source: Company accounts. *2022 announcements to date
Source: Refinitiv data
The case for and against share buybacks
America’s Securities Exchange Act of 1934 outlawed share buybacks as it deemed large-scale share buybacks could be a form of wilful share price manipulation. That was only repealed in 1982 by the Reagan administration, with rule 10b-18, and since then buybacks have become increasingly popular. The UK has followed America’s lead to some degree here, although dividends are still the more common means for returning cash to investors.
There are four clear arguments in favour of share buybacks:
- If a company is generating surplus cash, then it can return this money to shareholders and let them decide what to do with it, rather than splurge it on an unnecessary acquisition or capacity increases. This is a particularly acute issue at a time when interest rates remain low, even after some recent increases, and, as a result, firms are not gaining a substantial return on any cash holdings.
- Buybacks can work for individuals depending on their tax situation, and whether they prefer to be taxed on a capital gain (buyback) or dividend (income).
- Anyone who elects to retain their shares when a firm buys back stock will have an enhanced stake in the company and thus be entitled to a bigger share of future dividends (assuming there are any).
- Buybacks can also suggest that a management team feels a company’s shares are undervalued, so any move to buy purchase stock can be seen as a vote of confidence in the firm’s near and long-term trading prospects.
Equally, there are four reasons to treat share buybacks with some degree of caution and not blindly welcome them all as a good thing:
- History shows companies have a habit of buying stock back during bull markets (when their stocks tend to be more expensive) and not doing so during bear ones (when their stock tends to be much cheaper). For example, buybacks in the US topped out in 2007 and collapsed in 2008 and 2009 only to reach new highs in 2018 as stock prices reached new peaks. A similar pattern can be seen in the UK and the higher share prices have gone, the more buybacks there seem to have been in 2021 and 2022 on both sides of the Atlantic.
- The tendency among some management teams to buy high rather than low could therefore throw into question whether executives are sufficiently objective when they sanction a buyback to show the market they feel their stock is undervalued.
- A buyback could be used to massage earnings per share figures by reducing the share count at limited cost. This could be used to trigger management bonuses or stock options, courtesy of some near-term financial engineering.
- There is also the risk that some firms buy back stock using debt, potentially weakening their balance sheets and competitive position in the long term (although the same danger lurks with dividends).
Any short-term financial engineering could therefore damage a firm’s long-term ability to invest in its customer proposition and defend its market share to the potential detriment of profits, cash flow, the ability to return cash and – ultimately – the share price.
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