Large companies are once again turning to share buybacks
The sum of these operations and the distribution of dividends means that the remuneration to shareholders is around 50 billion.
BarcelonaBBVA – which has accelerated shareholder payouts after The takeover bid for Banc Sabadell failed– has been among the last to increase its share buyback programs, by an amount of nearly €4 billion, the largest in the company's history. With this latest operation, share buybacks by the major Spanish companies in the Ibex 35 will exceed €14 billion this year, at the same levels as the previous year, maintaining the upward trend of this shareholder remuneration method.
The fact that companies are engaging in these operations is related, among other reasons, to the fact that some have accumulated high levels of cash after achieving record profits in recent years. Therefore, they don't identify attractive investment opportunities, and this is one option. Furthermore, it's a way to revive their share prices. The role of activist funds in the shareholding of several companies is also important; they can demand higher shareholder returns if other investment opportunities are not identified. Another reason experts point to is that some companies are trading below their value.
According to data from BME, the company that manages the Spanish stock exchanges, as of November, the amount of share buyback programs by Ibex 35 companies was €10.507 billion, exceeding €14 billion once BB's announcement was included. If these practices up to November are added to the dividends distributed, which is the other way of remunerating shareholders, the amount received rises to 50 billion euros.
Share buybacks are a common way of remunerating shareholders in other countries, especially since the mid-1980s in the United States, and more recently, in Europe. In Spain, they gained momentum from 2021 onwards, when the European Central Bank (ECB) lifted its recommendation against distributing dividends or carrying out share buybacks during the pandemic. Therefore, the banking sector is one of the sectors with the most potential for growth.
Since 2021, financial institutions have carried out these types of operations for more than €22 billion. This year, BBVA had already launched one worth €993 million, which, added to the new €3.96 billion operation, reaches almost €5 billion. Banco Santander also plans one worth €1.7 billion starting in January, which will be in addition to the one launched in February for a total of €1.587 billion. For its part, CaixaBank has an operation underway with a maximum value of €500 million. But the banking sector is not the only one resorting to the acquisition of its own shares. One of the largest operations is that of IAG – the parent company of airlines such as Iberia, Vueling, and British Airways – for €1 billion. This program has a duration of twelve months. Another example is Cellnex, which, after launching an €800 million share buyback program during the first quarter of this year, plans another €500 million buyback, split into two installments of €250 million in January and €250 million in July.
More earnings per share or executive bonus
The buyback of shares –or share buyback, In English, a buyback involves a company buying back its own shares and canceling or removing them from circulation. The effect is positive for shareholders because with fewer shares in circulation, each shareholder's stake increases, allowing them to receive a larger share of dividends. For example, a company has 100,000 shares. A shareholder owns 20,000, representing 20% of the capital. The company buys 20,000 shares on the market and cancels them (removes them from circulation); 80,000 shares will remain, and the shareholder's stake will increase from 20% to 25%. This entitles them to a larger share of dividends and results in an increase in earnings per share. However, it's also possible for a company to buy back shares without canceling them. In that case, it would be a transaction that could aim to distribute these shares among the company's executives, either as part of their compensation or as a program to increase the stock's liquidity.
In summary, share buybacks can aim to increase earnings per share, distribute excess cash to shareholders, boost the price of shares considered undervalued, finance employee or management incentive plans, and adjust the capital structure.