When a company has spare cash to return to shareholders, it has two main ways to go about it. Firstly, it can hand it over as a special dividend, and that seems the simplest. But this year, a large number of FTSE 100 companies have been launching share buybacks instead.
In fact, it looks like we’re set for record levels this year. Tax-related issues can affect the decision on how to pay out. But a company is generally more likely to buy back its own shares when it thinks they’re cheap.
I’ve just looked at a single morning’s market news. And I see 12 FTSE 100 firms all buying their own shares.
Banking buyback
Barclays is still going strong on a share buyback it commenced in May. The bank expects to return up to £1bn of cash via this programme, bringing the total cash returned with respect to the 2021 year to £1.5bn.
That’s a bank, during a time of great economic pressure when banking shares are out of fashion. Whatever dangers might lie ahead for the sector, it does suggest Barclays thinks its own shares are undervalued. And it has the cash to buy them.
Melrose is also on a share buyback binge. The company was cautious earlier in the year due to global uncertainty. But in June, citing its ongoing strong financial position, Melrose was confident enough to confirm the return of up to £500m.
Melrose buys, turns around, and sells underperforming companies. The nature of that business means profit days can be spread well apart. And there are no profits forecast for this year and next. In those circumstances, I think it speaks positively of the company’s outlook.
Cash-generating stocks
British American Tobacco has been on a £2bn buyback since February. And that’s on top of a dividend yield of close to 8% for 2021.
Over in the financial management and investment business, both Abrdn and M&G are busy hoovering up their own shares. In the 2022 financial squeeze, investment managers are seeing cash outflows as clients shift their cash to places they think are safer.
But these two have spare cash to spend on their own stock. And makes me think the sector might be a good one to invest in this year.
Elsewhere, Kingfisher revealed a share buyback in June. It’s returning the relatively modest sum of £75m. But this is the home improvement and DIY retail business, at a time when inflation is soaring. Perhaps the economy isn’t doomed after all.
Multiple sectors
To complete the list of FTSE 100 firms buying back their own shares in a single day, I need to add Informa, Ferguson, CRH, Compass Group and Smiths Group. Oh, and I nearly forgot BP, on a new £2bn repurchase programme.
There are other share buybacks going on, but this is just a snapshot of transactions on one July morning.
I wouldn’t buy solely on the strength of a share buyback. And all of these stocks will face their own risks and require individual research. But other things being equal, this does all make me think the FTSE 100 is cheap right now.