Share buybacks soar in Asia but investors flag worries
Asia's share of share buybacks globally has risen fast in recent months, a development that some investors have welcomed, although others have warned of issues raised by such transactions.
Share buybacks typically take place when companies either have a lot of cash on hand or feel their stock price to be too low; they represent an effort to drive up the company’s market valuation. They can preclude the problems raised by paying large one-off dividends, such as incurring large tax liabilities, and can be used by management to signal a firm’s financial health.
In the six months to the start of May 2018, Asia Pacific comprised 60% of the 1,611 global share buybacks conducted in the world’s 20 largest stock indices, with Japan alone accounting for 35%, according to data provided by Theo Vermaelen, an academic at French business school Insead. That was far higher than the 17% for the US, which is traditionally the largest market for buybacks.
That marks a trend reversal. Between 1998 and 2010, the US accounted for 55% of global share buybacks, while Asia’s largest seven markets contributed 24%, according to an academic paper by Alberto Manconi of Bocconi University in Italy and Urs Peyer and Vermaelen of Insead, which was published in January.
Over that period, Japan alone represented 15% of the global share of buybacks. One reason the country has seen such swift growth in such transactions is its fast-rising focus on corporate governance and the stewardship of institutional investors in recent years, Naoki Kamiyama, chief strategist at Tokyo-based Nikko Asset Management, told AsianInvestor by email.
Companies in China and South Korea have also been executing more buybacks. South Korea’s share of the global total was 1% from 1998 to 2010, but rose to 8% over the six months to May, while China’s increased from less than 0.5% to 8%.
BENEFITS OF BUYBACKS
Frank Lee, acting chief investment officer (CIO) for North Asia at DBS Bank in Hong Kong, welcomed the growth of buybacks beyond Japan. “Firms should be doing more share buybacks,” he said, singling out Chinese construction firms as one sector where more could be done.
With interest rates still low, Lee said he preferred companies to buy back shares rather than pay down debt or pay large dividends, because of the positive effect on the share price.
Insead’s January research supports the claim that buybacks in Asia have a positive long-term impact on share price. Over four years following a buyback, buyback shares on average outperform the market by 24% in Asia ex-Japan and 16% in Japan. The equivalent figures were 40% in the US and 14% in Europe.
In nine out of 12 countries in Asia—all except Hong Kong, Singapore and Taiwan—there was a correlation between share buybacks and four-year outperformance.
Buybacks make better sense than using money to fund acquisitions, when the shares appear undervalued, said Jason Pidcock, manager of the Jupiter Asia Pacific (ex Japan) Fund in London. “When the valuation of the company in question is lower than potential acquisition targets, it may make sense to buy back shares.”
DEBT-FUELLED FEARS
Buybacks may be gaining traction in the region, but experts suggested investors should be wary of companies piling on debt to fund them.
Junk-rated companies often fund share buybacks in this way but the practice is “not desirable”, said John Woods, Asia-Pacific CIO at Credit Suisse. “Increasing leverage ratios in this way means a deterioration in a company’s fundamentals. In these cases, [buybacks] are not being used for productive purposes.”
Ultimately, investors should be careful to analyse the motivation for a buyback, noted Woods. “In Asia, we have witnessed companies conducting share buybacks during distressed periods, only to fail eventually,” he added, declining to specify examples.
Pidcock made similar points, noting he was suspicious of buybacks “where the company already has high gearing”. Whether a buyback decision is good or bad depends on the motivation, which can also be tricky to ascertain, he said.
BUYBACK PROSPECTS
Managers and analysts hold mixed views about the prospects for share buybacks in Asia the coming months and years.
David Lafferty, chief investment strategist at Natixis in New York, said the region was likely to see more share buybacks as firms have fewer places to put accumulated cash given that emerging-market growth rates are slowing.
Moreover, Pidcock expects some South Korean companies to follow Samsung’s lead in making more share buybacks in the coming months. The conglomerate has been buying back its shares for several years; in 2017, its total buybacks amounted to $8.4 billion, according to the company’s website.
However, Pidcock did not feel buybacks were likely to see growth across Asia as a whole despite firms’ strong cash positions, in light of tightening liquidity.
“Interest rates and bond yields are edging higher and quantitative easing is being wound down globally,” he noted, “so companies are likely to err on the side of caution and not look to pay out more than regular dividends.”