The FTSE 100 is set for record share buybacks. Time to buy?

Why do FTSE 100 companies buy back their own shares rather than handing over spare cash as extra dividends? And what does it say about them?

A person holding onto a fan of twenty pound notes

Image source: Getty Images.

The latest announcement from BP means FTSE 100 companies are on track to deliver record share buybacks this year. BP returned £1.2bn in buybacks in its first quarter, and has now revealed a further £2bn for Q2.

That brings the total value of share buybacks expected from FTSE 100 companies in 2022 to a whopping £37bn, which easily beats the previous record of £34.9bn in 2018. Let me explain why I think that’s great news for investors.

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The bounty has been boosted by soaring oil prices, and Shell looks set to spend £6.3bn on its own shares this year too. But if we leave out the oil sector, these are the five remaining biggest FTSE 100 buybacks of 2022:

CompanyBuybacksShare price12-month
change
P/E
Aviva£3.8bn417p-2%*8.2
Unilever£2.5bn3,627p-16%18.2
Diageo£2.3bn3,507p+0.4%27.0
Lloyds£2.0bn44p-9%6.1
British American Tobacco£2.0bn3,564p+25%12.1
Sources: Company announcements, AJ Bell, Yahoo! *Aviva is adjusted for stock split and capital return

Companies engage in share buybacks when they have surplus capital to return to shareholders. It means future earnings and dividends are spread across fewer shares, so each shareholder gets a bit more each year. And the share price should hopefully rise.

It’s the opposite of a problem that often hurts investors in startup growth companies — dilution. New companies repeatedly issue new shares to raise needed capital, which means future profits are spread increasingly thinly.

I certainly prefer buybacks, and I think it’s a great way to improve long-term returns.

Why not dividends?

Companies do often hand back spare cash as special dividends, which seems simpler. But buybacks can offer an added benefit at particular times. There are tax issues, which I won’t go into. But share valuation plays a part.

If shares are undervalued, a company can hopefully do more for its shareholders over the long term by snapping them up cheaply. So seeing these record buybacks in 2022 pleases me in two ways.

It’s clearly good that companies have the cash to pay out. But it also suggests the stock market is undervalued right now. It’s not just me that thinks Aviva and Lloyds are good value and worth buying. Aviva and Lloyds think so too.

FTSE 100 value

As it happens, I own shares in three of the companies in the table: Unilever, Aviva and Lloyds. Maybe that means I’m great at picking stocks that generate lots of cash to return to shareholders. Or maybe I just have a knack of finding the ones set for big share price falls. I’ll leave that for others to decide.

But seeing these buyback programmes does help me deal with my doubts and uncertainties. Maybe I didn’t make a mistake in buying these shares for the long term. At least the companies themselves seem to agree that they’re good value.

Time to buy

The bottom line for me is that 2022’s potential record FTSE 100 buybacks provide a bit of brightness to counter all the gloom we’re hearing about today. And it reinforces my conviction that now is a great time to buy shares for the long term.

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Alan Oscroft has positions in Aviva, Lloyds Banking Group, and Unilever. The Motley Fool UK has recommended British American Tobacco, Diageo, Lloyds Banking Group, and Unilever. 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.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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