I mostly invest in FTSE 100 stocks for dividend income these days. But there’s another way for companies to redistribute excess cash, and that’s through share buybacks. The idea is that the company buys its own shares for cancellation, and that means there are fewer for future earnings and dividends to be spread over.
In theory, it’s a way to improve long-term returns rather than making a simple one-off payment. But it has an extra use in helping us identify companies that think their own shares are undervalued. I mean, they really shouldn’t pursue share buybacks if they rate their shares as overvalued.
FTSE 100 miner Anglo American announced a $2bn return in July, $1bn as a special dividend with the other $1bn by way of a share buyback. It’s been steadily hoovering up its own shares on the open market ever since. I like the idea of buybacks in a sector like this, which can be very cyclical over the long term. Dividends rising and falling year by year can lead to very erratic income. But, hopefully, the buyback approach can help even out the cash over the long term.
FTSE 100 finance
The Aviva share price has been on the slide for a while now, down 10% over five years even after a 2021 recovery. The FTSE 100 insurance firm clearly thinks its shares are too cheap, and has been buying them since August. That’s when it announced a plan to return up to £750m to shareholders via that route. The buybacks should be complete by February 2022.
After returning to profit in the first half of 2021, NatWest Group commenced a share buyback in August. The FTSE 100 bank is in the process of buying up to £750m of its own stock. I’m not entirely convinced it’s the best way for a bank to be returning cash right now though. At least not until the ordinary dividend gets back to something respectable.
With this ‘Net Zero’ target the in thing these days, BP and Royal Dutch Shell have seen their share prices crumble. But both have cash to spare, and both have gone down the share buyback route. Shell’s buyback commenced in July, with a target of up to $2bn. Meanwhile, BP started its programme in August, planning to offload up to $1.4bn.
Over in the aerospace and defence business, BAE Systems appears to be awash with cash after a very profitable first half. As a result, at the end of July, the company announced a buyback programme of up to £500m. It’s expected to run through to July 2022. BAE is one that I’ve felt is undervalued for some time. I’m buoyed by the fact that the company’s board seems to think so too.
Do these buyback programmes mean I should buy? Well, it’s not that simple, and only time will tell whether these are good decisions. But of these few, I’m particularly drawn to BAE Systems. I’ve always liked the company, and I have often come close to buying. It’s definitely on my shortlist.
I tend to steer clear of miners. But I’m considering getting into the big oilies for their attractive rebased dividends. And I’m certainly intrigued by NatWest.
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Alan Oscroft owns shares of Aviva. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.