Analysis: Back with a bang, share buybacks offer boost for Europe Inc

JPEL Private Equity

16/08/2021 11:20

* European buybacks at highest in over four years
    * $35 bln worth of repurchases announced over Q2 
    * Pickup in buybacks seen adding fuel to market

    By Danilo Masoni and Sujata Rao
    MILAN, Aug 16 (Reuters) - Europe's record-breaking earnings
season has shown a sharp rise in the number of companies
repurchasing their stock, raising investor hopes of big
U.S.-style returns in a market that has  historically focused on
dividend payouts rather than buybacks.
    The buyback announcements stood out even amid Europe Inc's
near-150% quarterly profit surge, the best since Refinitiv IBES
records began in 2012 and analysts reckon they offer a further
tailwind for the pan-European STOXX 600 index, already at record
highs  .STOXX .
    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 the strongest reading
since late-2016. 
    In the United States, where rewarding investors by
repurchasing shares is far more common than in Europe, stock
markets have risen almost three times as much as European peers
did over the past decade. 
    How much of that outperformance is tied to differing
investor remuneration practices is hard to extrapolate. But it
stems at least partly from buybacks, which increase demand and
reduce supply for a company's 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 buybacks would be momentous for
Europe, potentially allowing shares to re-rate sharply, says Tom
O'Hara, portfolio manager at Janus Henderson, though he warns
that one set of buybacks would not be a "silver bullet".
     Investors had to be convinced buybacks would be "part of
the DNA of the company", O'Hara said, adding: "The market does
need to get that little bit of extra comfort that this is
something management teams are serious about and will stick
with".
    A raft of companies and sectors have announced repurchases
-- from retailer Carrefour  CARR.PA  starting its first buyback
in a decade to a $2.2 billion programme by steel giant
ArcelorMittal  MT.LU , which turned the page on years of
investor neglect.
    The list includes oil major Royal Dutch Shell  RDSa.L ,
insurer Allianz  ALVG.DE , chipmaker STMicro  STM.BN  and food
group Danone  DANO.PA .  
    Goldman Sachs recently raised its forecasts for European and
UK share prices, citing buybacks as one reason. Another bank
Berenberg suggested the return of buybacks could help European
insurers  .SXIP  catch up with U.S. peers  .SPXIN  after a 10
percentage-point underperformance so far in 2021.     
    
    CHANGE
    Morgan Stanley estimates at least $35 billion (30 billion
euros) worth of buyback programmes were announced this reporting
season and expects 2021 activity to exceed the prior $100
billion peak set in 2019.
    "Something is changing: more companies are announcing bigger
buybacks and I think this will continue...It can be a growth
stock, a value stock, a 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  .SPX  carried out $200 billion in buybacks in
the second quarter, following $178 billion in the first quarter,
according to S&P Global analyst Howard Silverblatt.
    The analytics firm calculated last year that 53% of U.S.
corporates had share buyback programmes in 2018, versus 28% in
1980. Meanwhile the proportion of dividend-payers almost halved
in the same period to 43% in 2018 from 78%.
    In Europe, just 26% of firms have buyback programmes. 
    
    DIVIDENDS VERSUS BUYBACKS
    Some analysts such as Grace Peters, EMEA head of investment
strategy at J.P. 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 stem too from companies' record
post-pandemic cash piles, estimated by Janus Henderson at $5.3
trillion globally. And unlike dividends, buybacks do not
necessarily represent a long-term commitment.  urn:newsml:reuters.com:*:nL5N2OI2W8
    Finally, European pension funds and insurance firms often
rely on dividend income especially with most bond yields stuck
below 0%.
    Morgan Stanley's Secker, however, said such funds would
benefit from higher share prices, while even a reduced dividend
income would compare favourably with bond yields.
    "So you can actually still give your investor a relatively
attractive (dividend) yield or income but at the same time boost
your growth rate by shrinking your share base," he said.
    Shares in companies repurchasing stock are outperforming.
    A European buyback index compiled by Solactive  .BUYEU  has
risen almost 30% this year, versus 18% gains on a benchmark of
dividend payers' shares  .SD3P . Similarly, the S&P 500 buyback
index  .SPBUYUP  with a 28% gain, is well ahead of a dividend
aristocrats index  .SPDAUDT .     
($1 = 0.8519 euros)

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Buyback - EU transcript mentions    https://tmsnrt.rs/3AsTFTc
EU buyback index    https://tmsnrt.rs/2VSWePO
Corporate net debt seen rising as companies spend pandemic cash
piles      urn:newsml:reuters.com:*:nL5N2OI2W8
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 (Reporting by Danilo Masoni in Milan and Sujata Rao in London;
editing by Emelia Sithole-Matarise)
 ((Danilo.Masoni@TR.com; +39-02-66129734; Reuters Messaging:
danilo.masoni.thomsonreuters.com@reuters.net; On Twitter https://twitter.com/damasoni))