Goldman Says Europe Buybacks Will Rise, But Not to U.S. Levels

(Bloomberg) -- Share buybacks will continue to increase in Europe, according to Goldman Sachs Group Inc., though a number of factors will keep them from becoming as popular as they are in the U.S.

“As a percent of cash usage, buybacks are small in Europe (6 percent) compared with the U.S. (25 to 30 percent),” strategists led by Sharon Bell wrote in a note April 12. “Buybacks have started to rise in Europe, and we expect this trend to continue.”

Drivers of the divide include European uncertainty that creates a need for a bigger cash buffer, earnings-per-share visibility as quarterly reporting is less common in Europe, and overall lower profitability in Europe in recent years, the strategists wrote. An ownership structure that’s different from the U.S., where management and staff have a greater portion of shares, also adds to the discrepancy, they said.

Goldman Says Europe Buybacks Will Rise, But Not to U.S. Levels

Buybacks have been getting increased scrutiny from politicians in the wake of U.S. tax reforms in late 2017, when companies used money saved from the lower levies to return cash to shareholders. Goldman’s New York-based strategist David Kostin slammed “misconceptions” about the practice in a note last month, following it up more recently with an ominous look at “a world without buybacks.”

“In 2007, share repurchases made up 12 percent of cash use, versus 6 percent today, implying upside potential,” the strategists said. “But we doubt that European companies will embrace a more U.S.-style buyback culture.”

©2019 Bloomberg L.P.