Market Jolts Make European Buybacks Newest Investor Favorite

  • Firms repurchasing stock faring far better in global rout
  • Investors searching for income and safety in stock market

Corporate buybacks are an everyday thing in the U.S. But in Europe, investors are only slowly warming to the idea.

European shareholders have historically preferred dividend stocks -- safe, income-paying investments. But the global equity rout may be changing that, luring jittery investors to companies confident enough to repurchase their own shares, according to JPMorgan Chase & Co.’s Emmanuel Cau. Equities tied to buybacks are showing signs of success, outpacing those with the best dividend ratios by the most since JPMorgan began tracking the strategies with indexes in 2013.

Among stocks reaping the benefits are ASML Holding NV, Danske Bank A/S and Ryanair Holdings Plc, all of which outlined buyback plans this year. One selling point: companies buying back shares -- still a rarity in Europe -- retain a bull case regardless of what happens to global growth, Cau said.

“The search for yield has been a big support for the market and because buybacks haven’t been so much in fashion here, investors sought dividend stocks,” said Cau, European equity strategist at JPMorgan in London. “People are getting more uncomfortable holding the expensive dividend plays. Buyback stocks offer a compromise because they give you a better balance between cyclicality and safety.”

JPMorgan’s buyback index soared 17 percent last year, more than double the gain for the Stoxx Europe 600 Index. ASML plans to repurchase an additional 1 billion euros ($1.1 billion) of stock, while Danske Bank almost doubled its previous buyback program this week. Both companies have fared better than the Stoxx 600 since its April record. Ryanair, which this week said it will repurchase 800 million euros of shares, is up 19 percent in the period.

Dividend payers haven’t done as well. The sustainable dividends index rose 3.1 percent last year and is down almost twice as much as the buybacks gauge in 2016. HSBC Holdings Plc, which has a payout yield of about double the average for European companies, touched its lowest since 2009 this week. Pearson Plc’s dividend yields 6.7 percent, and the shares have lost about half their value in less than a year.

To be sure, the market’s message has done little to transform attitudes among managers, who have carried out fewer and fewer buybacks in the years since the financial crisis. European firms are buying back the equivalent of about $33 billion in stock -- or half the volume in 2008, according to a JPMorgan note on Feb. 1. That compares with just under $140 billion for American companies.

The shift in investor preference for buyback stocks in Europe is relatively new: a study by Nasdaq Advisory Services early last year showed dividends handily winning in terms of return. Buybacks could catch on more as earnings improve and Stoxx 600 companies hold the most spare cash since 2008, according to data compiled by Bloomberg. A strong cash position will help Airbus Group SE, says Credit Suisse Group AG, which expects the plane maker to buy back as much as 15 billion euros in shares.

And one bright spot in the global equity rout -- repurchases have just become a whole lot cheaper.

“People want to own quality above all else in this kind of market,” said Dirk Thiels, head of investment management at KBC Asset Management in Brussels. “Buyback stocks attract a different profile of investors who are not just looking for a bond-like asset. These companies are using their cash flow sensibly. The high-dividend strategy has become a lot more sensitive to changes in risk sentiment.”

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