Back in the day a share buyback appeared to be the kiss of death for UK stocks. Many a beaten down company that was cashflow rich tried them and the more they bought back their stock the further the shares seemed to fall. It was as if a share buyback was pushing down the price.
“Oh no,” people would say the buyback cant be the reason for the chronic slow death of the share price, it must be something else… but in the end there is only so many times you can watch it happen before you are force to see the connection. Not surprisingly share buy-back did not become popular unlike the US where there became an ever more important driver.
This was before the global financial crisis. When that kicked off, all sorts of skullduggery was revelled that was rife behind the smoked glass curtain walled institutions that had become synonymous of wealth and power. Thus after a near miss for the global economy all sorts of new rules came into effect as all sorts of criminal activity was called out. Suddenly as loopholes were closed so were many ‘trading desks.’ What a coincidence.
Market theory says that a ‘trading desk’ cant make money, efficient markets offer no advantage, yet billion in traders bonuses were paid out. Obvious theory i#wass wrong. Except…..
The banks with ‘trading desks’ at their rotten cores all blew up, nearly taking the global economy with them.
So perhaps there was something to the market theory after all. You can’t beat the market, in the ends it beats you, unless…
…unless the participant is cheating.
This we know was true.
So if buybacks are meant to help the price of a share to rise, why did they make the price fall.
The implication is obvious
If a participant has a cheat for buy-backs, then there is way more money to be made from that cheat then simply buying up shares for a client. Sadly that cheat will suck value from that share and its price will fall by a function of that malformed profit.
Scamming the honest buyer and seller trough ‘trading’ is what market manipulation is all about and it is older than the hills. Its front running, layering, spoofing, wash trading, pump and dump, churning, cornering, painting the tape and son and on… financial institutions are famous transgressors. The funny thing is, buyback always worked in the US, but it was in the UK they seemed to be toxic, but since those day of yore, something has changed.
So fast forwards to 2024. Buybacks are now all the rage in the UK and what do you know, they seem to be working. Companies doing buybacks are seeing their share prices rise, just like the text book says they should.
Because of this new found success, other companies are all jumping on the bank wagon and the daily regulatory news is now filled to overflowing with buyback updates.
So it seems that swizzing companies doing buy backs is no longer a thing in london and a good job to and it also means that the poor benighted FTSE 100 has finally got a weapon in its armoury to get its valuations up to the levels of Europe and the US. That is a pretty long journey as you can see from the following chart.
This provides a very bullish catalyst for the long-term investor in good companies because there is so much catch up to be had if the FTSE 100 turning point has been passed. There is now a mechanism for cashflow positive companies to reprice themselves and get their ratios looking more like a German or US company.
People and for that matter many funds want to buy shares for one simple reason: they are going up. They don’t care why or how or even when, they want to own a share this going up and going up now. Few are interested in cheap shares, or great companies or any of the dull fundamentals of solid investing, it momentum or nothing.
So with buy-backs finally a strategic way to add value to companies it is a tailwind for a market that offers superb value and perhaps finally a catalyst to pull the venerable London stock market out of its death spiral.