Europe’s Biggest Firms Are Buying Up Their Stock Again

(Bloomberg) -- While the pandemic nearly wiped out equity buybacks over the summer, a reawakening in recent months bodes well for European investors starved of returns.

After buybacks in the blue-chip Euro Stoxx 50 Index slumped about 95% in the summer months compared to last year, October marked an increase from 2019, according to data compiled by Bloomberg. November’s tally was down 17%, but still at comparable levels to the prior month. That, along with with the gradual return of halted dividends, indicates an uptick in shareholder returns as the worst of the pandemic’s impact eases.

But while the sums have normalized, the field is somewhat narrow: only eight companies among the 50 in the index have bought back shares since the start of October, including chip-equipment maker ASML Holding NV and grocer Ahold Delhaize NV. That may signal a need for more stock-picking in the post-pandemic world.

“Companies were not completely averse to revisiting their buyback policies, though fewer in number than the firms with active dividend policy,” Barclays Plc strategists led by Magesh Kumar Chandrasekaran and Emmanuel Cau wrote last month in a note on third-quarter European earnings. They highlighted that “a much larger proportion of companies have reinstated buybacks in Q3.”

And while equities have started to price in an economic recovery on the back of progress in coronavirus vaccines, the strength of the buyback resurgence will be tested in the coming months, with the early part of the year tending to be the busiest.

Dividends, more popular than buybacks among European firms, have also taken a hit from the pandemic. And while U.S. dividends have been the most resilient in the world, buybacks have borne the brunt of American firms’ cash-preservation moves, analysts at Janus Henderson wrote last month.

Return to Normal

To find income amid the misery, JPMorgan Asset Management’s Sam Witherow considers what a complete return-to-normal scenario would mean for each stock.

The co-manager of JPMorgan’s Global Dividend and Global Equity Income funds says he looks for valuations that have been most distorted by Covid-19. He is overweight on Europe, where “valuations don’t reflect the dividend recovery outlook,” he said in an interview.

“We’re all going to be ordering our favorite drinks at our favorite bars. Valuations don’t reflect that.”

-- Sam Witherow, JPMAM portfolio manager

Industries that were previously deemed to be safe dividend payers have suffered because of the unique nature of the current crisis and its regulatory consequences. While banks and energy companies were dethroned early on amid an oil slump and central banks’ directives to shore up capital, the fallout of upended consumer behavior is also becoming clearer.

While European banks are unlikely to pay dividends before the second half of 2021, their excess capital holds the potential for upgrades on earnings per share from buybacks, restructuring or mergers and acquisitions, RBC Capital Markets LLC analysts wrote in a note last month.

The derivatives market is even more pessimistic. Euro Stoxx 50 dividend futures expiring in December 2021 and 2022 both remain about 19% below analysts’ dividend-per-share expectations. Despite the positive vaccine newsflow, the futures trade below their June levels, while the index itself has risen about 9% in the second half.

Dividends should benefit from positive earnings and payout revisions in 2021, with dividend strips having been an attractive equity replacement strategy since 2005, Goldman Sachs Group Inc. strategists including Christian Mueller-Glissmann wrote in a report on Dec. 1.

“We just have to re-tune our brains to go back to what life was like before Covid,” JPMorgan’s Witherow said. “Because that’s the reality we’re going to end up in for most industries.”

©2020 Bloomberg L.P.