- HSBC to run a $3 billion share buyback in third quarter alone
- Announcement takes FTSE 100 total buybacks to £45.9 billion in 2024 to date
- Financials and oils lead the buyback charge – with Shell’s next announcement still to come
“The debate over the rights and wrongs of the bumper profits made by banking giant HSBC will run and run but from the narrow perspective of investment its announcement of a new, $3 billion share buyback scheme means that the FTSE 100 cash return bonanza continues,” says AJ Bell investment director Russ Mould. “Dividends, takeovers and buybacks mean that the UK stock market, and the FTSE 100 in particular, remains a prime source of cash and yield for investors at a time when interest rates seem set to decline, and this could help sustain the still modest improvement in sentiment toward the much-maligned UK stock market.
“After HSBC’s announcement of its third buyback this year, FTSE 100 firms have announced plans to return £45.9 billion to their shareholders via this mechanism so far in 2024.
“That figure supplements a forecast aggregate dividend pay-out of £78.6 billion for 2024 and could set the index’s members on course for a new all-time high in buybacks – the current record is the £58.2 billion handed out in 2022.
“Whether the final total for 2024’s buybacks will match or exceed that of two years ago remains open to question, and much may depend on the trajectory of the global economy in the second half, but we are certainly off to a fast start.
Source: Company accounts. *2024 as announced to date
“40 members of the FTSE 100 have announced or conducted share buybacks in 2024 to date, compared to 42 in 2023 and 45 across the whole of 2022.
“HSBC’s $3 billion third-quarter plan supplements outlays of $3 billion in Q2 and $2 billion in Q1 (not forgetting $8.8 billion in 2023 and $4.6 billion in 2022, including the redemption of some preference shares).
“Investors still seem pleased, especially as the bank is also announcing quarterly dividends of $0.10, a figure which equates to some $1.9 billion every three months on the current share count.
“Analysts’ consensus forecasts for the full-year dividend, plus the $0.21-a-share special dividend and the buybacks, mean HSBC is on track to return some $23 billion, or £18 billion, to its investors. That is the equivalent of 14.5% of its stock market valuation (and the figure could be higher still if the bank runs another buyback in the fourth quarter).
Source: Company accounts, consensus analysts' forecasts, 2024E buybacks as announced to date
“That may help to explain why the shares are nudging back toward the 700p mark, pretty much their highest level since 2018 – and that is despite the ongoing woes of China and Hong Kong, two key markets for the lender.
Source: Company accounts
“HSBC’s announcement also cements the financials sector’s position at the top of the buyback charts, as ranked by industrial grouping – although if Shell’s second-quarter earnings announcement next week features comments on buybacks for the second half of 2024 then those rankings could change.
Source: Company accounts. *Announced to date
“This buyback largesse complements analysts’ forecasts for aggregate ordinary dividend payments from the FTSE 100 of £78.3 billion, plus HSBC’s £3 billion special dividend. That is a total of £127.6 billion and equivalent to 5.9% of the FTSE 100’s current total market capitalisation of £2.1 trillion.
Source: Company accounts, consensus analysts' forecasts, 2024E buybacks as announced to date
“That is competitive when compared to the Bank of England base rate, or the yields available on UK government bonds, or gilts, although the danger remains that buyback plans are revised and dividend forecasts prove over-optimistic, should a recession or another unexpected development strike.
“Note also that a big buyback programme is not a guarantee of share price performance, as shareholders in Diageo and Reckitt Benckiser will attest.
“Both firms are among the ten biggest companies as ranked by buybacks announced this year, yet Diageo’s shares are stuck at levels last seen during the pandemic and Reckitt’s shares languish near 10-year lows, despite chief executive officer Kris Licht’s plans for a major overhaul of the company’s structure and strategy.
“Some of this is down to the challenges facing those firm’s addressable markets, or their specific competitive position within them, while Reckitt has hardly been helped by the fallout from its disastrous acquisition of Mead Johnson. But the valuations attributed to both stocks could have had a role to play here, too, as buybacks work best – and create the most value for shareholders – when companies buy back their shares cheaply and are least effective when they purchase them in a willy-nilly fashion in the open market at almost any price. No investor would try such an approach in an attempt to generate the best risk-adjusted returns from a stock, so it boggles the mind that companies feel it is an effective value-creation tool.
“It does make sense for the banks to buy back shares because they are cheap, using several benchmarks including earnings, yield and especially book value, although only three of the Big Five FTSE 100 banks now trade at a discount to their latest stated net asset value (NAV) per share.
Source: Company accounts, consensus analysts’ forecasts, LSEG 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 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.”
