9th May 2022 13:24
(Alliance News) - Investors in London-listed blue-chip equities are set for a bumper year of returns, research from AJ Bell showed on Monday, with share buybacks on track to hit a record high.
Helped by a second-quarter buyback plan from BP PLC worth USD2.5 billion, about GBP2.0 billion, FTSE 100 firms are now planning GBP37 billion of share repurchases this year, topping the previous peak of GBP34.9 billion in 2018, figures from AJ Bell showed.
"The debate over BP's bumper profits and the rights and wrongs of a windfall tax looks set to continue, but the facts of the matter are that the oil major's latest plans to return cash to its investors mean the FTSE 100's members are poised to set a new all-time record for share buybacks in 2022," AJ Bell analyst Russ Mould commented.
BP's planned buybacks for the year now amount to GBP3.2 billion, behind only Aviva PLC's GBP3.8 billion and Shell PLC's GBP6.3 billion.
"It also cements the oil and gas giant's third-placed ranking for buybacks since 2000," Mould added.
By that measure, BP is behind Vodafone Group PLC GBP39.1 billion, while Shell tops the list again with GBP39.5 billion in buybacks since 2000.
The chunky buybacks for 2022 mean investors could "stick with UK equities rather than look elsewhere", Mould noted. However, the analyst also noted the hefty returns plans could prove "over-optimistic, should a recession or other unexpected development strike".
Back in 2020, a parade of London-listed firms cancelled or delayed payouts due to the emergence of Covid-19.
Mould said: "Buybacks are particularly subject to revision, as there is far less stigma when a management team quietly parks a programme compared to when a boardroom has to sanction a dividend cut. In 2020, FTSE 100 firms returned GBP10.2 billion to their shareholders via buybacks but scrapped plans to buy back GBP10.3 billion more as the pandemic spread, lockdowns were imposed, and the globe plunged into a recession, to the great detriment of corporate profits cash flows and in some cases balance sheets."
AJ Bell's Mould laid out the case for and against buybacks.
Buybacks mean surplus company cash is not used to "splurge on an unnecessary acquisition or capacity increases". They are also a sign of management confidence in a firm's future prospect.
In addition, it could benefit the investor depending on their tax situation and whether they would rather be taxed on capital gains or income.
On the flip side, Mould noted that there is a risk if buybacks are executed using debt, therefore weakening a company's balance sheet.
History has shown buybacks often happen during bull runs in the market, meaning when stock prices are on the rise, rather than bear markets, when shares are cheaper.
"For example, buybacks in the US topped out in 2007 and collapsed in 2008 and 2009 only to reach new highs in 2018 as stock prices reached new peaks. A similar pattern can be seen in the UK and the higher share prices have gone, the more buybacks there seem to have been in 2021 and 2022 on both sides of the Atlantic," the analyst explained.
"The tendency among some management teams to buy high rather than low could therefore question whether executives are sufficiently objective when they sanction a buyback to show the market, they feel their stock is undervalued."
Buybacks may also be used to "massage" earnings per share metrics. Buybacks reduce the share count and may be used to "trigger management bonuses or stock options, courtesy of some near-term financial engineering", Mould added.
By Eric Cunha; [email protected]
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