UK listed companies keep “shrinking” as share buy-backs outweigh capital raising by two-to-one

Publications that covered this story include City AM, 5 February 2013.

  • Good news for investors but is it a worrying message for the growth of the UK economy?

UK listed companies returned twice as much money to shareholders through buybacks in 2012 as they raised in new capital.

In 2012, UK listed companies spent £12.4 billion on buying back and cancelling their own shares compared to the £5.9billion they raised from the stock market through IPOs and rights issues*.

While the recovery in share buy-back activity is a welcome indicator of the revived financial health of existing listed companies, the lack of fundraising is a more worrying long-term indicator.

Laurence Sacker, corporate finance partner, London, says: “The imbalance suggests that companies do not see enough investment opportunities to ustify keeping hold of cash let alone raising new cash from shareholders.”

“It also indicates, that even with the stock market at four year highs, investors do not have anything like a healthy appetite for new share issuance.”

Laurence says that although stock markets play a useful role in valuing companies and as a trading platform, the role as a capital raising tool should not be underplayed.

He adds: “The Government needs businesses to raise more money and invest more money. They could help renew enthusiasm in share investing by reversing their recent increases in Capital Gains Tax, perhaps with a special exception for shares bought at an IPO.”

Return of share buy-backs

The return of share buy-back activity signifies a reversal of the trend seen at the peak of the financial crisis when many companies used the stock market to repair their balance sheets.

In 2009, just £593 million was returned to shareholders through buy-back schemes, while companies raised £76.7 billion, largely through rights issues.

Laurence says: “Companies often use share buybacks as a means of increasing earnings per share which should have a positive impact on the share price.”

“The fact that so many companies are conducting share buyback schemes is not bad news per se. Indeed, it shows that the market that is functioning quite well: companies are sufficiently financially robust to afford it, and they are responsive to investor demands.”

“However, share buy-backs tend to be favoured when companies are not using their capital to pursue medium and long-term growth initiatives such as major investment in organic growth.”

“That’s why companies like Apple or Tesco, which not so long ago were considered to be growth plays, are now responding to investor pressure to return capital in the way that mature businesses like Next have been doing for years.”

Low proportion of new issuance activity suggests UK Plc has yet to regain appetite for growth

The low levels of new issue activity indicate that it is both investors and companies are reluctant to commit to longer-term growth opportunities.

New share issuance remains low in both absolute and relative terms, raising just £5.9 billion in 2012 compared to £16.5 billion in 2007.  The proportion of money raised compared to money returned to market through share buy backs also fell, from 42% of all share issuance and cancellation in 2006-07 to just 29% in 2011-12.

Laurence says: “The gap between the level of share buy-backs and the level of money-raising remains wider than we would like to see because so few new companies are coming to the market and few existing companies are seeking capital to fund new initiatives.”

“A narrowing of that gap would be an important indicator that the market is starting to fire on all cylinders and returning to its crucial function of funding future growth.”

*Includes placings

UK listed companies – new shares issued and repaid/cancelled (£billion)