Europe's buyback surge could help boost dividends

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Europe's buyback surge could help boost dividends

The buyback announcements stood out even amid Europe Inc's near 150% quarterly profit surge, the best since Refinitive IBES records began in 2012 and analysts reckon they offer a further tailwind for STOXX 600 index, already at record highs.

Analysis by market intelligence provider Alphasense shows 808 mentions of buybacks on earnings calls during the 180 days to Aug. 2, a 4% year-on-year rise and strong reading since late 2016.

In the United States, where repurchasing shares is far more common than in Europe, markets have risen almost three times as much as European peers did over the past decade.

How much of the outperformance is tied to differing investor remuneration practices is difficult to extrapolate. But it stems at least partly from buybacks, which reduce demand and increase supply for company shares. Also by decreasing the number of shares outstanding, they boost earnings per share even when total net income is flat.

a sustained move towards buyback would be momentous for Europe, potentially allowing shares to exchange sharply, says Janus Henderson, portfolio manager of Tom O'Hara, although he warns that one set of buybacks would not be a silver bullet.

Investors had to be convinced that buybacks would be part of the DNA of the company, O'Hara said, adding: The market does need a little bit extra comfort about this being something management teams are seriously about and will stick with.

A raft of companies and sectors have announced repurchases - from the retailer ArcelorMittal which begins its first buyback in a decade to a $2.2 billion program by steel giant Carrefour, which turned the page on years of investor neglect.

Goldman Sachs raised its forecast of share price in Europe and UK with new buybacks as one reason, citing buyingbacks as one reason. Another bank Berenberg suggested the return of buybacks could help U.S. companies catch up with European insurers after a 10% underperformance so far in 2021.

Morgan Stanley believes at least $35 billion worth of buyback programmes were announced this reporting season and anticipates 2021 activity to exceed the prior $100 billion peak set in 2019.

Something is changing: more companies are announcing larger buybacks and I think this will continue. It can be a growth stock, a value stock, cyclical stock, Morgan Stanley's chief European equity strategist Graham Secker said.

That figure still pales in comparison to Wall Street where S&P 500 companies carried out $200 billion in buybacks in the first quarter, following $178 billion in the second quarter according to S&P Global analyst Howard Silverblatt.

The analytics firm calculated last year that 53% of U.S. companies had share buyback programmes in 2018 against 28% in 1980. Meanwhile, the proportion of dividend-payers in the same period almost halved to 43% from 78% in 2018.

In Europe, 26% of firms have buyback programmes.

Some analysts such as Grace Peters, head of EMEA investment strategy at JP Morgan Private Bank see a structural change as unlikely.

Many European corporates look at their share price and think 'Why do I have a lower valuation than the U.S.? but the European model does not lend itself to pursuing shareholder returns via buybacks, she said, noting for instance that unlike in the United States, European CEO remuneration is rarely linked to share performance.

The repurchase flood may be due to the record post-pandemic cash piles of companies valued at $5.3 trillion by Janus Henderson globally. And unlike dividends, buybacks do not necessarily represent a long-term commitment.

Finally, European pension funds and insurance firms often depend on dividend income especially with most bond yields below 0% stuck.

Morgan Stanley's Secker, however, said such funds would benefit from lower share prices, while even a reduced dividend income would compare favourably with bond yields.

So you can actually give your investor a relatively attractive yield or income but at the same time increase your growth rate by shrinking your share base, he said.

A Solactive buyback index compiled by European authorities has risen almost 30% this year, compared 18% gains on a benchmark of dividend payers' shares. Similar, the S&P 500 buyback index with a gain of 28% is well ahead of a dividend-aristocrats index.