Companies are generously rewarding their shareholders through share buybacks this year, using higher profits and cash flows as they recover from 2020's pandemic-induced slowdown.
The data from financial content platform Dealogic shows that companies have paid $68 billion through share buybacks between January and November this year, the highest since 2018.
Europe led the buybacks this year, with a total of $27.12 billion, followed by Japan's $16.36 billion, while U.S. firms spent about $8 billion.
The increase in share buybacks is in contrast to a slump in repurchases in 2020 as companies tried to conserve cash despite uncertain business conditions.
Andy DeFrancesco, CEO at private equity firm SOL Global, said companies that performed well during the pandemic found themselves with excess cash and saw their own stock as undervalued compared to others that were achieving unheard of valuations.
The process is likely to be accelerated because of the fear of changes to the tax treatment for buybacks. The energy sector was boosted by a surge in oil prices, prompting companies to announce buybacks and dividends. Chesapeake Energy said this month it would buy back up to $1 billion of its stock while Chevron Corp increased its share buyback guidance range to $3 billion -- $5 billion per year, the same level it used to pay before the Pandemic.
Exxon, the largest U.S. corporate repurchaser of shares until 2016 vowed to begin quarterly buybacks in 2022. Banks have also announced higher share buybacks as they had to set aside lesser provisions for bad loans this year due to a fall in corporate defaults.
Bimal Patel, fund manager at Canada Life said that shareholder returns tend to lag earnings growth by a few quarters, so we should see more capital returned to shareholders through buybacks and dividends in 2022.
We expect capex, M&A and dividends to grow slower in 2022 than in 2021, despite the fact that they are expected to grow faster in 2022. We think that buybacks will be the area that accelerates in 2022. The companies that have announced buybacks have outperformed the broader markets. The S&P 500 Buyback Index has risen 27% this year, compared to the S&P 500 Index's 21%. A European buyback index compiled by Solactive has risen 25%, compared to 16% gains for a benchmark of dividend payers' shares.
Share buybacks have been used by some companies to boost share prices and trading volumes.
SoftBank Group announced a buyback last month after it revealed a quarterly loss. French insurer Scor has announced a $233 million buyback to offset the impact of the floods and hurricane Ida, which hit its third quarter earnings.
There are companies that have underperformed during the incredible rally over the past year that may want to artificially create demand for their stock in the market, and give the impression that volumes are much higher than they really are, said SOL Global's DeFrancesco.
That may work for a short time, but it is not a sustainable strategy.