Back os the Share buyback

Share buybacks rise to a record level in 2022 to almost match dividend payouts. But rising interest rates could turn the tide.

Share buybacks at the dividend level

Spring is traditionally the dividend distribution period for European and Swiss companies. The level of dividends is slightly up over 3 years (+6%) but varies greatly from one sector to another. The dividend yield is currently highest in the metals and mining sector and in the energy sector with yields of around 5%, while technology or telecoms offer the lowest level of yield (1%).

Dividend yield (%)

Globally in the market, the 1200 largest companies paid out USD 1390 billion in dividends in 2022. This is an all-time high. This level is only slightly higher than the year's share buybacks, which rose to USD 1310 billion.

Share buybacks and dividends (USD billion)

The growth of share buybacks is 22% in 2022. Even if development is volatile, the last few years, with the exception of 2020, have seen an explosion in buybacks.

Growth in share buybacks

A share buyback is an operation in which the company buys back its own shares on the market. This reduces the number of shares outstanding and thus increases the earnings per share. Thus the company theoretically pays the same dividend for fewer shareholders, which increases the dividend per shareholder. This mechanism ultimately tends to increase the value of the shares.

Share buyback to dividend ratio

The ratio between share buybacks and dividends has increased massively over time. Ten years ago, share buybacks represented only 52% of the value of dividends paid, in 2022 it was almost 95%.

Concentrated buyouts

The growth of these share buybacks affects all geographical areas. But it is North America where most of this activity is concentrated (76% in 2022). Of the ten largest companies that accounted for a quarter of the global share buyback volume in 2022, nine are American. Only Shell (UK) is outside the US. Apple is the largest buyback company with 89 billion in the last year, or 7% of the total.

Share buybacks by region (USD billion)

In terms of sectors, technology and financial companies have historically been the biggest contributors to share buyback programs.

Share buybacks by sector (USD billion)

In 2022, technology will account for 22% of buyback volumes. But the biggest contributor to growth over the year is obviously the energy sector, with 135 billion in share buybacks, almost 4 times the 2021 level.

Share buybacks by sector 2022

Growth in share buybacks by sector, 2022

Programs that could be reduced

Share buyback programs and their significant growth in recent years are partly explained by growing profits and a good level of free cash flow. But more importantly, they are also the consequence of the period of low interest rates. Low interest rates encourage companies to take on cheap debt in order to buy back shares and improve their profitability. Unfortunately, this does not always translate into improved stock market performance, and some investors prefer to receive dividends, even if the tax treatment may be different.
The recent rise in interest rates could change this. This will not affect technology companies flush with cash (e.g. Apple), but it will inevitably lead many less profitable companies to reconsider share buybacks. Companies will now have to choose between repaying their loans to avoid higher costs and buying back shares to improve short-term profitability per share. The end of the period of low interest rates will finally allow companies to return to less short-term management.