Buybacks make a comeback as crisis eases

So far in 2021, 16 companies have announced buybacks including FTSE 100 members Barclays, Berkeley Group and Sage, according to figures compiled by AJ Bell. Companies such as IP Group and Rightmove have announced their intentions to restart buybacks.

On Wednesday Balfour Beatty was the latest company to announce positive buyback news, increasing its planned repurchase to £150m from £50m. The announcement took buybacks announced so far in 2021 to £2.2bn.

The trend is a big turnaround from 2020 when more than £10bn of buybacks were scrapped and only £1.6bn of share repurchases were approved and carried out from March to December as companies conserved cash during the Covid-19 crisis.

The buyback slump in 2020 followed a multiyear splurge that peaked in 2018 when UK groups purchased £36bn of their own shares. Buybacks return cash to shareholders but critics say they increase returns for affluent asset owners at the expense of employees and stifle investment needed for companies and economies to thrive.

Market commentators predicted buybacks would be less popular when the crisis subsides after companies were left with threadbare finances to cope with plunging revenues. Buybacks usually supplement dividends, which though under scrutiny are seen as longer-term fixtures of corporate planning.

Russ Mould, investment director at AJ Bell, said: "Just a year ago, corporations were looking to preserve every penny as they prepared to face the virus and its economic fallout. Now some clearly feel sufficiently confident to return precious cash to their shareholders.

“Shareholders must now decide whether this is a sign that corporate confidence is flooding back and the good times are about to roll once more, or whether boardrooms are letting down their guard too quickly in the wake of the pandemic."

Mould said there were good reasons why companies might buy back shares including letting shareholders decide what to do with the money instead of splurging cash on an acquisition. He said this is particularly relevant when record low interest rates mean companies make hardly any return on cash.

Buybacks can also suggest a company's shares are undervalued. Warren Buffett, the world's most revered investor, has said if a company has ample money to meet its needs and its shares are selling at significantly less than a conservative valuation of its intrinsic business then buybacks can be a good thing.

“There will be some who see this rapid return to corporate largesse as a worrying sign, and one that reflects the return of animal spirits and frothy, bull-market conditions within equity markets," Mould said.