US share buy-backs have more than doubled this year as companies have taken advantage of tumbling borrowing costs.
The volume of US share buy-backs in the first half of 2010 jumped 139 per cent from the same period a year ago, according to Morgan Stanley, which has obtained data from CapIQ. The volumes rose from $56bn in the first half of 2009 to $133.9bn in the first half of 2010.
The number of European buy-backs has risen from 10 in the full year of 2009 to 21 year to date in 2010, says Morgan Stanley based on Thomson Reuters. However, volumes are still below the peaks seen in recent years.
According to Birinyi Associates, US companies bought back $228.35bn of shares in the third quarter of 2007.
“One of the consequences of low economic growth rates, low interest rates and quantitative easing has been to push down the absolute yield on government debt and with it the yield on corporate debt,” said Adrian Cattley, analyst at Citigroup in a research note. “This has made the coupon paid by the average corporate now close to the lowest it has been for the last 20 years,” Mr Cattley said.
“At the same time the corporate sector profitability has recovered quickly,” he added. “This has created an arbitrage opportunity. Debt is cheaper to the issuer than equity. This is the fuel for de-equitisation.”
According to analysts at Citi, the level of European buy-backs has picked up from the very low levels last year but is still well below peaks seen in 2004.
Some companies such as Microsoft and Hewlett-Packard have already exploited what bankers at UBS have described as the most attractive relative cost of debt-to-equity in 30 years by issuing bonds in order to buy back shares.
“The result of record cheap funding and strong free cash flow is the return of the debt-equity arbitrage – the de-equitisation trade,” said the Citi analysts.
“This arbitrage opportunity is biggest for those companies with the cheapest funding costs and with the highest 2011 (estimated) free cash flow generation. Mega-caps are best placed to use cheap debt funding to retire more expensive equity funding.”
In September Microsoft announced plans to raise its dividend by 23 per cent over the previous quarter and authorised up to $6bn in additional debt as part of an expected move to buy back its shares.
Actelion, the Swiss biotech company with a market capitalisation of SFr6bn ($6.1bn), last month revealed a SFr800m share buy-back programme as it stressed its desire to remain independent.
According to the Citi analysts, mega-cap corporates have, at $2,800bn, too much equity.
With corporates being largely cash rich, but reluctant to pursue M&A, some bankers believe share buy-backs may be the most optimal way for them to create shareholder value
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