European companies’ equity buybacks have surged to a record $100 billion over the past 12 months, with the strategy of betting on those firms beating returns from U.S. counterparts over the past five years, according to Morgan Stanley. The strategy is also rewarding company stocks more than the payment of high dividends, according to the bank.
“This is the first time we have seen strong buyback performance outside of bear markets or recessions,” strategists led by Graham Secker wrote in a note Tuesday. “More striking, our net buyback factor has shown much greater efficacy in Europe than the U.S. over all time frames.”
One of the reasons European stock repurchasers are faring better is that the practice is less common in the region than among American firms, said the strategists. Buying back equity can provide a much-needed boost to the world’s most-shorted equities, which have been seeing almost non-stop outflows for more than a year amid sluggish economic growth and political uncertainty. Doing so should boost earnings growth, trading liquidity and demand for shares, Morgan Stanley wrote.
European shares are trading at lower valuations than US shares so stock buybacks should have a positive impact simply because of the base effect. However, $100 billion is not all that much in comparison to what US companies are spending. Clear signaling from European corporations that they are willing to step in to support the value of their shares is probably going to be required to change perceptions.Click HERE to subscribe to Fuller Treacy Money Back to top