Statistics illustrate quite powerfully how vital buybacks have become in markets outside of the U.S., as a means of returning value to shareholders. Buybacks globally have tripled in value in ten years, compared to a 54% increase in dividends, with almost every region and sector across the globe increasing their use of buybacks. 2022 was a record year globally with share buybacks jumping to an all-time high of $1.31 trillion1. While the U.S. still leads the world, buyback activity has increased in other countries such as the U.K., which recently saw a record high percentage of companies buying back at least 1% of their own shares, as well as in Japan, Germany, and France2.
Before we dive into the investment case for international buybacks, we provide some details into the nature of stock buybacks and announcements from major governments.
Stock buybacks, also commonly called share repurchases, refer to companies buying back a portion of their own shares. Typically, when companies make a profit, they have four ways of utilizing their profits, including issuing dividends, retiring outstanding debt, reinvesting profits, and buying back shares3. Buybacks reduce shares outstanding, and in turn, increase their earnings per share. Companies return excess cash to shareholders who have taken the risk of providing capital to the firm. To this end, buybacks offer an appealing option to companies to deploy excess cash when there are not enough growth opportunities or investment alternatives internally. Additionally, they help in consolidating ownership and provide a means of simplifying corporate governance4.
As companies across the world deploy share buybacks at a faster clip, they have come under more scrutiny by governments and the media. We are seeing the emergence of guidelines for the optimal implementation of buybacks. Major governments including that of the U.S., U.K. and Canada have imposed or are considering taxes on buybacks to encourage companies to reinvest in their workers and businesses. For example, in 2022, the U.S. Congress passed the Inflation Reduction Act, which included a provision for publicly traded companies to pay a 1% excise tax on stock buybacks. In 2023, President Biden proposed to increase the buyback tax to 4%, which would further reduce the tax advantages of buybacks over dividends - but no further action was taken. Canada followed suit with a new proposed share buyback tax of 2% that was introduced in the Federal Budget in 2023. A buyback tax in the U.K. is being considered, with a study conducted by leading think tanks suggesting that a windfall tax on buybacks will help in raising tax revenue and advancing economic justice goals. Such measures indicate that governments are encouraging companies to consider alternative strategies for distributing their profits, which may result in a change in the pace of buyback activity.
Despite some concerns regarding their usage, buybacks are likely to continue to be an important vehicle for returning money to investors. As per an analysis by Professor Michael Roberts of the Wharton Business School, buybacks send a signal to the market that companies are well-disciplined, returning cash to investors while having a negligible short-run effect on stock prices5. They are as powerful as dividends in boosting shareholder value, as demonstrated by a study by McKinsey6.
In 2024, the market environment will likely be characterized by a continued normalization of the economy and markets as they recover from high inflation and several years of post-pandemic impacts on labor markets, supply chains, and spending patterns. To this end, investors looking for opportunities to add diversification to their equity portfolios, particularly those who are overweight Technology, might consider buyback indexes.
Download the full report to read about:
- Nasdaq International Buyback Achievers™ Index
- Eligibility Criteria
- DRBXUST™ vs. NQGXUST™ (Total Return Performance History)
- 10-Year Total Return Performance: DRBXUST vs. International Benchmark Indexes
- Risk Statistics
- Sharp Recent Growth in Constituent Count
- Top 10 Allocations
- Country Allocations
- ICB Industry Allocations
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