European Companies Seen Splurging $180 Billion on Buybacks

Bookmark

Fear and caution in European boardrooms may be fading, as a pick-up in buybacks shows rising confidence that more cash can be returned to shareholders instead of shoring up balance sheets.

Just as blue chips including LVMH, L’Oreal SA and BP Plc announce large buybacks, Societe Generale SA strategists estimate that European companies will spend 150 billion euros ($180 billion) to purchase their own shares next year. That’s a 25% jump from the average of 120 billion euros in the five years before the pandemic.

And SocGen is not alone in forecasting this pattern.

“We expect European buyback activity to rise sharply,” Morgan Stanley strategists including Ross MacDonald and Graham Secker wrote in a note on Wednesday, predicting both an increase in payouts and a growing inclination to effect them by repurchasing shares, rather than paying dividends.

European Companies Seen Splurging $180 Billion on Buybacks

A combination of companies’ survival instincts and political pressure meant that cash distributions almost completely dried up during the pandemic. In the equities rally that followed initial vaccine breakthroughs last November, stocks with high buyback ratios outperformed, while “dividend aristocrats,” value investors’ long-time favorites, lagged behind the broader market.

European Companies Seen Splurging $180 Billion on Buybacks

“This could be another incentive for companies to repurchase their shares, despite the lofty valuations,” Barclays strategist Emmanuel Cau wrote in a note on Wednesday, referring to the buyback factor’s recent strength.

LVMH’s ‘Earth-Shattering’ Buyback a Sign of Times: Taking Stock

European companies’ free cash flow is likely to rise faster than dividend allocations during the recovery, creating more room to buy back shares and invest, according to the SocGen strategists, led by Roland Kaloyan.

They highlighted that dividends instantly reduce the share price when paid, while buybacks don’t -- a possible reason why shares of European companies, which primarily return cash to the holders through dividends, have trailed their U.S. peers, which tend to reward investors by repurchasing stock.

European Companies Seen Splurging $180 Billion on Buybacks

Cash held on European balance sheets spiked last year as companies made pre-emptive cost cuts, sought government support and, in the case of banks, were barred from paying dividends. The result was a cash pile so large it offset rising debt issuance, leading to an overall decrease in net debt. That has dialed up the pressure on executives to resume distributions.

European Companies Seen Splurging $180 Billion on Buybacks

Another, more unusual indicator suggests payouts are back on the menu. On earnings calls by companies in the Stoxx Europe 600 Index, mentions of buybacks and dividends have risen in the last two quarters compared to a year earlier.

European Companies Seen Splurging $180 Billion on Buybacks

Eni SpA was among the latest companies to announce buyback news, saying Friday it will assess the resumption of share repurchases, linked to the Brent oil price. Banco Bilbao Vizcaya Argentaria SA Chief Executive Officer Onur Genc said the lender aims to start a buyback program announced earlier this year in the fourth quarter.

“More buybacks would be a significant positive signal for European equities in general,” Morgan Stanley wrote, citing the last decade’s pattern of buyback stocks outperforming. The strategists added that such a shift would probably entice global and U.S. investors to re-engage with the region.

Large European buybacks announced since March
DateStockBuyback, up to
April 29UnileverEU3b
April 28CarlsbergDKK1b
April 27Norilsk Nickel$2b
April 27BP$500m
April 27DSV PanalpinaDKK4b
April 21LVMHEU47.9b (max at highest stock price)
April 21L’OrealEU1.2b
April 21CarrefourEU500m
March 30Scout24EU794.2m
March 25ABB$4.3b
March 25AroundtownEU500m
March 8Deutsche PostEU1b
March 4VinciEU2b
March 4SageGBP300m
March 2Lindt & SpruengliCHF750m

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.