Why are so many ASX 200 companies conducting share buybacks?

Qantas and Commonwealth Bank are among the ASX 200 blue-chips conducting share buybacks today.

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Many ASX 200 companies are in the midst of share buyback programs
  • A buyback is when a company repurchases and cancels a certain amount of stock, thereby reducing the overall number of shares on issue
  • Companies conducting buybacks include Qantas, Commonwealth Bank, AMP, Whitehaven Coal, IAG, and Santos 

Scores of ASX 200 companies are in the midst of share buyback programs, and some of them are doing it in lieu of paying dividends.

Among them are Qantas Airways Limited (ASX: QAN), Commonwealth Bank of Australia (ASX: CBA), AMP Ltd (ASX: AMP), Insurance Australia Group Ltd (ASX: IAG), Nine Entertainment Co Holdings Ltd (ASX: NEC), Whitehaven Coal Ltd (ASX: WHC), and Santos Ltd (ASX: STO).

So, why are so many companies doing this?

What's a share buyback?

A buyback is when a company repurchases some of its own shares from shareholders. The company then cancels those shares, which reduces the overall number of shares on issue.

The greatest benefit is that future profits are shared across a smaller pool of shares.

This should boost the earnings per share (EPS) for everyone, which is why shareholders generally show enthusiasm for buyback announcements.

Well, most of the time. I'll explain this later.

Why are ASX 200 companies running share buybacks?

Capital management is the prime reason for doing a share buyback.

Companies can be motivated to deploy excess capital because it's simply not a good look to have too much spare cash on the books.

Kinda makes shareholders cranky.

They like to see the majority of excess cash either distributed to them (via dividends or buybacks) or deployed to expand the business and grow its earnings.

The typical scenario for a share buyback is a company with excess cash on its books buying its stock back when it thinks the share price is undervalued.

A bunch of factors led to many ASX 200 companies announcing buybacks in the second half of 2022.

Soaring commodity prices delivered record earnings to energy and mining shares.

On top of that, a hangover of stimulus payments coupled with better-than-expected performances during COVID left many companies with surplus cash.

And share prices fell.

The S&P/ASX 200 Index (ASX: XJO) fell by 5.5% over 2022, thanks to rising inflation and interest rates.

Many ASX 200 shares fell harder, sparking the opportunity for some companies to rebuy their stock, on the cheap, for longer-term benefits.

Many companies announced buybacks in the August reporting season of 2022. A lot of these buyback programs are still underway today.

At the time, the head of research at K2 Asset Management George Boubouras explained why so many ASX 200 companies were doing this.

Boubouras said (courtesy of Australian Financial Review (AFR)):

We went through a robust reporting period for fiscal 2022 and now a very challenging reporting period for fiscal 2023.

It's good to use [buybacks] given equity valuations are not expensive. … doing it now with the uncertainty of earnings for the fiscal year ahead makes a little bit of sense, as you're not paying a lot of money for your future earnings.

In October 2022, Bloomberg reported that 40 companies had announced buybacks, up 74% on 2021.

What are the benefits for shareholders?

Over time, a buyback will typically improve the EPS for everyone. Capital gains and dividends are shared across a smaller pool of shares. Everyone's happy.

It also lowers the company's price-to-earnings (P/E) ratio, which makes it more attractive to investors, which in turn can boost demand and raise the share price.

Just announcing a share buyback can send the share price northward.

It's typically interpreted as a big signal that the company is financially healthy and that management has enough confidence in the future to reinvest today.

Warren Buffett loves a buyback

The world's most revered investor, Warren Buffett is a big fan of share buybacks.

He reckons if a company has no attractive acquisitions available, it might as well buy back some of its own stock if the share price is attractive.

Buffett says:

… disciplined repurchases are the surest way to use funds intelligently: It's hard to go wrong when you're buying dollar bills for 80¢ or less.

He argues that a share buyback returns value to shareholders in a tax-free way.

What are the negatives for shareholders?

Companies sometimes undertake buybacks in lieu of paying dividends or paying larger dividends.

That's the case with James Hardie Industries plc (ASX: JHX), which scrapped its dividend in November 2022 in favour of a year-long on-market buyback program worth up to US$200 million.

James Hardie CFO Jason Miele explained the rationale:

Today we adjusted our Capital Allocation Framework to better match who we are: a growth company.

The number one and primary focus of our Capital Allocation Framework is to invest in organic growth; our 5-year average Adjusted ROCE of 36% is proof that investing in our growth should be our number one use of capital.

Returning excess capital to shareholders via a share buyback rather than a dividend provides a growth company the optimal flexibility to ensure investment in organic growth is prioritized while maintaining financial strength and flexibility through cycles.

Through these cycles we will target an average leverage ratio below 2.0x.

The James Hardie buyback will end on 31 October.

The choice to do a buyback instead of paying a dividend isn't so great for income investors.

That's the biggest negative.

This is particularly the case for retirees, who are often relying on their ASX shares to fund their living expenses.

Dividends are paid quickly but the benefits of buybacks take time to flow through to investors.

This is why many Australian investors prefer dividends to share buybacks, especially if their companies pay franking credits.

Our unique franking system makes ASX 200 shares a very tax-effective form of investment return.

Motley Fool contributor Bronwyn Allen has positions in Commonwealth Bank Of Australia and James Hardie Industries Plc. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Nine Entertainment. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A piggy bank on the cloud in the blue sky symbolising a record high share price.
52-Week Highs

12 ASX 200 shares that smashed historical peak prices today

Twelve ASX 200 shares rose to new multi-year peaks in an otherwise quiet day of trading.

Read more »

A woman's hand draws a stylised 'Top Ten' on a projected surface.
Share Gainers

Here are the top 10 ASX 200 shares today

Investors saw another day of mild gains for the stock market this Thursday.

Read more »

Two boats on the water with crates with the words trade war in the middle.
Share Market News

Trump's tariffs blocked by trade court: Which ASX 200 stocks could benefit the most?

These 3 ASX 200 stocks have heavy tariffs exposure.

Read more »

A man in his 30s holds his laptop and operates it with his other hand as he has a look of pleasant surprise on his face as though he is learning something new or finding hidden value in something on the screen.
Broker Notes

How this undervalued ASX All Ords share could rocket 80% in a year

A leading fund manager expects a big turnaround for this beaten-down ASX All Ords stock.

Read more »

Man looking happy and excited as he looks at his mobile phone.
Share Gainers

Why Champion Iron, Clarity Pharmaceuticals, St Barbara, and Woodside shares are charging higher today

These shares are having a good session today. But why are investors buying them?

Read more »

Frustrated stock trader screaming while looking at mobile phone, symbolising a falling share price.
Share Fallers

Why ALS, Black Cat, Boss Energy, and Soul Patts shares are falling today

These shares are falling on Thursday. Let's find out why.

Read more »

A car dealer stands amid a selection of cars parked in a showroom.
Broker Notes

Up 77% in a year, guess how much more upside Macquarie tips for Eagers Automotive shares

Macquarie released its latest analysis on Eagers Automotive fast rising shares this morning.

Read more »

Boy looks quizzical standing in front of a graph.
Share Market News

Big ASX 200 news! Stock market whipsaws as Trump's tariffs struck down

Markets initially surged on news that Trump's tariffs are out.

Read more »