Rise in frequency of share repurchases explained
In the first quarter of the year, global dividend payouts reached a record high of $339.2 billion, according to the Janus Henderson Global Dividend index. However, the UK's dividend growth was relatively pedestrian, with ordinary dividends rising 2.4% on an underlying basis to $15.3 billion.
Buybacks, an alternative to dividends, are growing in popularity among UK companies. This shift is partly due to their flexibility for boardrooms, as James Gard for Morningstar suggests. Buybacks allow companies to repurchase their own shares, which can boost the value of remaining shares for shareholders.
Recently, significant investment activity has been observed in the UK, particularly in the energy sector. Diversified Energy completed the acquisition of Canvas Energy for $550 million, while BGF, a key player, conducted the largest stock purchases in the UK. Notably, BGF played a significant role in the $1.5 billion transaction related to OrganOx, one of the biggest medtech exits.
Despite the economic challenges posed by Brexit, the pandemic, and surging inflation, UK plc has seen a surge in buybacks. Companies like BP and Barclays have reduced their share count by 17% and 14% respectively since the start of 2021. This move indicates a belief among CEOs that their shares are undervalued, a sentiment echoed in a recent article.
The FTSE 100's forecast ordinary dividend yield is 3.8% this year, a drop from the 5.3% yield when buybacks already announced are factored in. Ordinary dividends are forecast to come in at £79.7 billion this year, still 6.5% below the all-time high of £85.2 billion paid out in 2018, says Russ Mould of AJ Bell.
Paul Schultz of the University of Notre Dame states that a dividend reflects a company's capital discipline, respect for small investors, and prudence. However, the common argument for buybacks is that the shares are undervalued, as mentioned in the article.
Nick Shenton of Artemis Income notes that share buybacks are more prevalent in the UK than ever before, as stated by Hargreaves Lansdown. British shares are trading at historically low levels, which further supports the case for buybacks.
In conclusion, while the UK's dividend growth remains modest, the trend towards buybacks suggests that companies are looking for ways to boost shareholder value amidst economic uncertainty. This shift towards buybacks could be a sign of a broader trend in the UK market, as companies seek to navigate the challenges posed by Brexit, the pandemic, and inflation.
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