‘Something extraordinary’ is going on in UK and European stock markets, analyst says

The growing taste for share buybacks in Europe and the UK is giving companies a hidden advantage over their US rivals, analysts at Liberum have argued.

According to their research, yields on share buybacks in Europe and the UK are now roughly equal to peers in the US.

European firms have traditionally relied on dividends to reward shareholders with US firms preferring buybacks, the analysts said.

“Over the last couple of years, something extraordinary has happened in European stock markets,” said Liberum analyst Joachim Klement. “Corporate executives have decided to increasingly use share buybacks to support their share price.”

The Stoxx 600 now sports a buyback yield of 1.8 per cent, slightly lower than the 2.1 per cent across the S&P 500.

However, at 3.5 per cent, dividend yields in the Stoxx 600 remain well above the 1.6 per cent across the S&P 500. This means, taking into account the yield on both the dividend and the buyback, European stocks have a hidden advantage of 1.6 points against the US.

Richard Spedding, corporate partner at law firm Travers Smith, told City A.M.: “Buybacks have long been a popular tool to boost demand for US shares, but it does seem the UK and other markets, such as Japan, France and Germany, are now catching up.

“If non-US companies trade at sizeable valuation discounts to their US peers, you can see that a high buyback yield could be attractive. They can also be more tax efficient for certain investors than dividends.”

Liberum’s research also showed that companies with the highest share buyback yields outperformed those with the lowest in the last year.

The broker found return for shareholders who invested in the 20 per cent of European companies with the highest buyback yields had an average return of 10 per cent per year, compared to a return of 6.6 per cent for those who invested in the 20 per cent companies with the lowest yields.

The broker expects this outperformance to eventually settle down but noted that “in an environment where investors are starved for yield, the outperformance of companies buying back shares aggressively is likely to persist, as it did after the financial crisis”.

Global buybacks reached a record $1.3 trillion in 2022, according to Janus Henderson, representing 94 per cent of dividends last year. Buybacks nearly tripled in the UK, totalling $70.53bn last year.

Experts have questioned the explosion in buybacks, with some arguing they do not benefit shareholders as much as dividends.