There are various ways that businesses can spend their profits. They can reinvest them to boost their operations and future growth. They can pay directors higher salaries and bigger bonuses — very popular among these fortunate folk. Or, they can introduce or raise cash dividends. Or they can buy back their own stock, as Legal & General Group (LSE: LGEN) recently did.
L&G buys itself
FTSE 100 firm Legal & General dates back to 1836, when it was founded by six lawyers in a London coffee shop. Over 189 years, it grew to become one of the UK’s leading providers of life assurance, long-term savings, and investment products. Today, the group — widely known as L&G — manages around £1.1trn of financial assets for individual and institutional clients.
As a successful British business, L&G generates plenty of excess cash. Some is used to fuel future expansion, but much of the group’s cash flow goes to its owners as dividends. As I write, the shares trade at 239.9p, valuing the company at £13.6bn. At this level, the dividend yield is almost 9% a year — one of the highest in the London stock market.
Despite this market-beating cash yield, L&G has billions of pounds of spare capital. Hence, its directors decided to spend some of this pile by buying back L&G’s own shares.
Share buybacks
Analysts expect FTSE 100 companies to pay £80.4bn in total dividends in 2025. They also expect Footsie firms to buy back more than £39bn of their own shares. In other words, these businesses are spending around £1 on buybacks for every £2 of dividends.
As for L&Gl, it announced a £500m buyback programme on 12 March 2025. By 2 September, this was completed, with the company purchasing over 203.4m L&G shares at an average price of 245.81p a share. Can you see the problem here? The group spent half a billion pounds to own shares worth 2.4% less today. In short, it lost around £12m from this programme.
This money has been wasted, right? Well, not exactly. The company intends to cancel these shares. This reduces L&G’s share base, meaning that shareholdings of existing investors — including my family portfolio — are now worth more. Indeed, this programme reduced the number of shares in issue by over 3.4%.
Therefore, my family’s ownership share of L&G has increased, at no direct cost to us. Also, thanks to the lower share base, future dividends will be distributed among fewer shares, making these payouts more sustainable and likely to rise faster. That looks like a win-win for me and other L&G owners.
In summary, while this share buyback has proved to be a short-term lemon (negative), I expect it to be a long-term cherry (positive). Finally, the success or failure of buyback programmes can’t be measured in weeks or months. It can be years before this type of spending comes good or is revealed as an unmitigated success or failure.
