UK blue-chips are on track for a record year for share buybacks after oil giant BP announced a boost in its own buybacks over the coming months.
Last week, BP said that it will repurchase £2bn of its shares in the second quarter of 2022, following its first-quarter splurge of £1.2bn on buybacks. This came as the firm reported its highest operational profit since 2008, after soaring oil prices helped it achieve net earnings of £5bn in 2022’s first quarter.
Russ Mould, investment director at AJ Bell, said this means FTSE 100 businesses are planning £37bn of share buybacks across 2022, which would take it well beyond the previous peak of £34.9bn in 2018.
FTSE 100 share buybacks since 2000
Source: AJ Bell, company accounts. *2022 based on announcements to date
“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,” he said.
Other companies to recently announce share buybacks for this year include Next and Endeavour Mining, while the 10 biggest FTSE 100 names for share buybacks over both 2022 and since 2000 can be found in the table below.
Source: AJ Bell, company accounts. *2022 based on announcements to date
These buybacks would come in addition to analysts’ forecasts of the FTSE 100’s aggregate dividend payments reaching £81.2bn this year (before any special dividends). This suggests a forward dividend yield of 3.9%; the cash yield on the index would reach 5.7% after planned share buybacks add another 1.8 percentage points.
Mould said: “That may provide some succour to patient investors who are looking at a broadly flat capital return from the FTSE 100 in the year to date. This is the second-best performance among major indices in the world in 2022 so far, trailing on Brazil’s modest gains, in local currency terms.
“Those planned cash returns may therefore be helping to persuade investors to stick with UK equities rather than look elsewhere, although the danger remains that buyback plans are revised and dividend forecasts prove over-optimistic, should a recession or other unexpected development strike.”
FTSE 100 dividends and share buybacks since 2011
Source: AJ Bell, company accounts, Marketscreener, analysts' consensus forecasts
It needs to be kept in mind that share buybacks are easier to roll back on than dividends when times are tough, as the market tends to focus more a company’s record of dividend payouts.
Mould pointed out that FTSE 100 companies scrapped plans to buy back £10.3bn in 2020 as the Covid-19 pandemic sparked unprecedented lockdowns and pushed the global economy into lockdown, denting corporate cashflows, profits and balance sheets in the process. The value of cancelled buybacks that year was slightly higher than the £10.2bn that were completed.
“Cynics will also flag how buybacks tend to be pro-cyclical. Buyback activity reached its high in 2006-07, as animal spirits were running most strongly just before the great financial crisis swept the world. Over £60bn in buybacks across those two years did nothing to support share prices in 2007-09 and buybacks slowed to just £3bn in 2009 by the time the crisis was passing, and equity markets had collapsed and thus become much cheaper,” the investment director finished.
“Buybacks reached their next zenith in 2018 and buyback activity peaked that year, too, so management teams’ record of buying high rather than low may give some investors pause for thought as to whether buybacks are a potential contrarian indicator, especially in light of global equities’ spring woes.”