Splashing the cash: How war and rate rises have led to a bonanza of share buybacks

Banks and defence companies have been returning billons to their shareholders via buybacks that are going into overdrive for September

Traders at work on the floor of the New York Stock Exchange. Defence companies and banks have been returning cash to shareholders via share buybacks. Getty Images

An increasingly dangerous geopolitical world and the rapid ascent of interest rates led to steep profit rises for the likes of defence companies and big banks in recent times.

After more than two years of interest rate rises by central banks, global commercial banks have been enjoying record profits, while the cashflows of large aerospace and defence manufacturers have been swelled by governments placing orders in the wake of rising tension and conflict in the Middle East and the war in Ukraine.

Indeed, numbers crunched by Vertical Research Partners show aerospace and defence companies in the US and Europe doubling their cashflows by the end of 2026.

Meanwhile, global banks have been raking in the cash as they experienced jumps in net interest income (NII) – the difference between what a bank pays out in interest to savers and receives in interest from loans. NIIs have ballooned over the past two or three years as central banks increased interest rates and kept them relatively high.

This has all meant that many large companies in certain sectors have found themselves with a lot of extra cash on their balance sheets, sparking an increase in share buybacks.

Simply put, share buybacks are exactly what they sound like – listed companies buying back their own shares from their shareholders. They differ from dividends which are a more fixed arrangement of rewarding shareholders.

The financial motivation for corporations to do this comes down to three things: consolidation of ownership, preservation of the stock price and reduction of cost of capital.

Normally, share buybacks only happen when companies have excess cash sloshing around. After making allowances for investment and other obligations, the company can use its extra cash to buy back its shares and cancel them. This essentially reduces the share capital and, in theory, boosts the earnings per share ratio, a key indicator of a company’s financial health.

Just this week, the Spanish bank Santander announced a buyback for as much as €1.5 billion ($1.7 billion), which follows a similar one launched in February.

In recent weeks, Standard Chartered chief executive Bill Winters said in an interview with Bloomberg Television that the Asia-focused bank will “buy back as many shares as we can with surplus capital”, while Barclays announced a new £750 million share buyback in early August.

Indeed, Britain, the country’s four big lenders, Lloyds, HSBC, Barclays and NatWest, made a combined pre-tax profit of £44.2 billion in 2023, up 41 per cent from £31.4 billion the year before.

At the end of July, HSBC announced its third share buyback for 2024, with $3 billion (£2.33 billion) due to be returned to shareholders in the third quarter alone.

Meanwhile, BAE Systems announced the first tranche of its latest £1.5 billion buyback scheme in late July.

However, it is not only the cash-flush banks and defence companies that are indulging their shareholders with buybacks. PayPal increased its 2024 buyback programme to $6 billion, up from $5 billion, and in the UK, the gas company Centrica said it plans to buy a further £200 million ($257 million) in shares, adding to the £1 billion buyback scheme the British Gas owner started in November 2022.

But the big spender is Apple. In May, the tech firm, said it was going to spend $110 billion on buying back its own shares. The company likes to do buybacks – in 2018, it spent $100 billion doing it and $90 billion a year between 2021 and 2023.

Meanwhile, for Russ Mould, investment director at AJ Bell, the companies that make up London’s FTSE 100 share index could be set for a record-breaking year of share buybacks, surpassing the £58.2 billion handed out in 2022.

“Whether the final total for 2024’s buybacks will match or exceed that of two years ago remains open to question, and much may depend on the trajectory of the global economy in the second half, but we are certainly off to a fast start,” he said.

'Sugar highs'

On the face of it, share buybacks would seem to be a win-win for both companies and shareholders – companies get more control, reduce their share capital and the costs (like dividend payments) associated with that, while shareholders get to pocket extra cash.

But for some observers they have a darker side – after all, share buybacks were banned in the United States for most of the 20th century, as they were suspected to be a tool of market manipulation. It was only under the Reagan administration of the 1980s that share buybacks were essentially legalised and since then company executives have favoured them for their ability to boost share values and earnings per share ratios.

But not all are in favour. Elizabeth Warren a US senator described them as “sugar highs” for corporations, claiming they played no productive role in the long-term prospects for corporations, something only reinvestment could do.

Others feel buybacks increase inequality in societies, given only a small number of people benefit and hold back economic growth because the excess cash should always be reinvested.

“Stock buybacks are a prime source of economic inequality in the United States,” William Lazonick, emeritus professor of economics at the University of Massachusetts and president of the Academic-Industry Research Network, told The National.

“They are also the reason why the United States has fallen behind globally in critical technologies such as aviation, advanced chip fabrication, 5G, and EV batteries.

“Stock buybacks done as open market repurchases should be banned,” he added.

Over the years executives have been accused of pushing ahead with buybacks to inflate share prices which, because they often own large amounts of stock, leads to self-enrichment.

Even considering that, and the perception that buybacks or repurchases hamper long-term investment, Professor Alice Bonaimé at the University of Arizona’s Eller College of Management, believes that, on balance, they can be a positive force in the markets.

“There is limited evidence for these claims, and they should be weighed against the benefits of stock repurchases, the main one being that repurchases allow companies to distribute extra cash back to investors instead of spending it on pet projects,” she told The National.

Investor Warren Buffett said share buybacks are intrinsically neither good nor bad, and Mr Mould believes each “should be treated individually on its merits”.

“If a company has spare cash, once it has met all of its bills, invested fully in the defence and development of its competitive position within its target market and left itself a buffer of cash on its balance sheet just in case something unexpected happens, then a buyback can be considered,” he told The National.

“If the shares are then trading below intrinsic value, a buyback will create value and makes sense.

“If the shares are trading above intrinsic value, then the maths are not anywhere near as compelling, and the buyback needs to be viewed with greater scepticism. And if debt is being used to fund the buyback then that is just a bad idea, full stop.”

Buy low, sell high

The trouble with many share buybacks is that companies are often very bad at timing them and end up paying top dollar for their own shares. Much of this is out of their control and is, for the most part, a Catch-22 situation – the main reason companies have the surplus cash to fund a buyback in the first place is that business has been going extremely well, which in itself creates demand for the shares and pushes the prices higher.

Nonetheless, some observers feel that while buybacks are related to higher earnings, they may be less of an indication of corporate health than they used to be, simply because so many large companies now choose to do them, and often.

“In decades past, repurchasing companies used to outperform other companies on average,” Prof Bonaimé told The National. “Repurchases used to signal high future returns.

“Now, repurchases are essentially ubiquitous. Many companies repurchase, and many repurchase very frequently. As such, repurchases no longer carry as much good news as before.”

Flexibility

But share buybacks are still seen by many as a more desirable way of returning monies to shareholders than via traditional dividends.

Dividends tend to be seen in the market as a signal of persistent strength, something investors get very concerned about if reduced or cancelled. But investors almost view share buybacks as a bonus, something which is here one year, but gone the next.

“If a company is worried about the future but has cash to pay out now, then a buyback may be the preferred route to go down,” former Bank of England economist Stuart Cole told The National. “Such programmes are seen as more flexible, while the level of dividend payments tends to be viewed as permanent.”

Likewise, Prof Bonaimé sees buybacks as being in the interest of shareholders as well, because they remove excess cash from a company’s management, cash they might be tempted to do something rash with.

“For example, assuming a company has already exhausted its good investments, shareholders would rather a company give remaining cash back to them through a buyback or dividend than spend it on a bad acquisition,” she said.

Lessons from the markets

It is, however, not all plain sailing for share buybacks and analysts are at pains to point out that the best-laid plans can go seriously wrong, especially if the basic principles, like allocating investment capital first, are not adhered to.

Essentially, using financial engineering, or worse still borrowing, to fire up earnings per share through a murky share buyback can end in disaster.

One startling example of this, says Mr Mould, is the computer chip maker, Intel which has spent $63 billion on share buybacks over the past decade, but recently missed its second quarter estimates and warned of more to come.

“Intel has spent $63 billion on buybacks in the last decade and look how much good that has done,” he told The National.

“The share price is no higher than it was a decade ago and the company is still failing to crack the mobile communications market and is locked in a dogfight for market share with AMD in artificial intelligence where it seems to be coming off second-best right now.”

Signals and motivations

It is difficult to extract any clear indicators as to the future direction of markets or economies from the level of share buybacks, simply because each one can differ in myriad ways from the next one.

Much depends on motivation. Why does management want a share buyback now? Have they exhausted all the investment avenues to grow the business? Is there enough cash on the balance sheet for a “rainy day”? Might a company be looking to beef up its earnings per share ratio via a buyback in order to protect it against unwanted takeover bids?

“If the buyback is financed out of cash that is simply sitting on the company's balance sheet, then I guess it raises questions of why those funds have not been invested [back into the company], and if that is potentially a signal that the management do not believe the economy is performing strongly enough to warrant increasing investment now,” Mr Cole said.

There remains some debate as whether share buybacks signal a market peak. Just a few weeks ago, the market had a spectacular few days of see-sawing from losses to gains, as concerns mounted about the US economy dropping into recession, the unwinding of the yen carry trade and geopolitical tensions in the Middle East.

Half of the companies listed on Wall Street will enter a quarterly blackout period in the middle of September when, in the run-up to third quarter results, share buybacks are not permitted.

But until then analysts say there will be strong demand, which can only increase when Wall Street’s traders return to their desks on Tuesday following the Labour Day weekend.

Indeed, the corporate buyback desk at Goldman Sachs in New York saw its strongest demand of the year last week, more than twice the same period in 2023.

But share buybacks can be turned off as easily as they are turned on, and if companies foresee tough economic conditions ahead, they may well be minded to cancel buybacks and protect their cash.

If profit margins get squeezed for any reason, Mr Mould told The National, then “the buyback tap could be switched off pretty quickly”.

“That’s what happened in 2007-2009 and 2020.”