The pandemic has slowed down share buybacks in Belgium


Article of l’Echo with the contribution of Professor Theo Vermaelen (INSEAD) co-manager of the DIM fund – PV Buyback USA

While everywhere else companies are once again buying back their own shares en masse, their peers listed on Euronext Brussels are more timid. Share buybacks are more than 50% lower than they were before the pandemic.

In recent weeks, the markets have been flooded with announcements from European companies that they are buying back their own shares as an extra gift to their shareholders. On the Amsterdam stock exchange, ASML, ASMI, Philips, Arcelor Mittal and KPN, among others, have announced share buyback programmes worth billions of euros. The British oil group BP even wants to spend £1 billion per quarter on share buybacks if possible. “To get excess cash back to shareholders”, explained its CEO, Bernard Looney. On Wall Street too, buybacks are going well. Whereas in 2020, when the pandemic broke out, companies scaled back their share buyback programmes as a precautionary measure, S&P500 members spent $178 billion on share buybacks in the first quarter of this year, up 37% from the first quarter of last year. Since the beginning of the year, Brussels-listed companies have spent €777 million on buybacks. While this amount may seem high, it should be compared to the €3 billion spent annually before the health crisis. Last year’s biggest ‘buyers’ – Ageas, Euronav, D’Ieteren, EVS and Roularta, to name but a few – have not spent anything this year. The figure only includes buy-back programmes that are intended to cancel the shares afterwards, not those that are used to feed stock option plans or to promote the marketability of the share. Share buybacks are a way of rewarding shareholders in ways other than by paying a dividend. When a company buys back its own shares and destroys them, the profits are then distributed over a smaller number of shares. This automatically increases the shareholders’ share of the pie. In addition, earnings per share also increase, which is positive for the share price. Companies that buy back their own shares en masse allow the share price to remain above a certain floor. Finally, share buybacks are more advantageous from a tax point of view than dividends, on which shareholders have to pay a 30% dividend tax.

777 million € Since the beginning of the year, companies listed in Brussels have spent €777 million on share buybacks. While this may seem like a lot, it should be compared to the €3 billion spent each year before the health crisis.

Warren Buffet

Even the investment super champion Warren Buffet, who for years was a critic of share buybacks, has changed his mind. In his latest annual report, he even praises the merits of this approach. His holding company Berkshire Hathaway does not hesitate to buy back its own shares. According to Buffet, the advantages far outweigh the disadvantages. There are disadvantages: the company loses cash, which reduces its permanent reserves in the event of a setback. “Many companies see share buybacks as a better way of distributing cash to shareholders than increasing the dividend,” says Theo Vermaelen, professor at Insead and the University of Chicago.

Vermaelen is also co-manager of an investment fund – PV Buyback USA (distributed in Belgium by Deminor Investment Management) which invests in US companies that have announced share buyback programmes. “For companies, any increase in the dividend represents a form of commitment for the future and must be sustainable in the long term, in contrast to share buybacks. A dividend cut is indeed very badly perceived by the market, whereas share buybacks make it easier to adjust the redistribution of profits to shareholders in line with results.” “Large buybacks indicate that companies are very confident and producing strong results,” Vermaelen continues. “Moreover, in this period of low interest rates, cash does not pay much. In Europe, companies even have to pay to put this money in the banks. I don’t understand why this practice is so unpopular in Belgium. Even though there are good reasons not to do so. Companies with a lot of debt have an interest in reducing their debt, even if the debt ratio is generally low. And it goes without saying that companies with large investment projects need these funds. On the other hand, there is always the possibility that management feels that shares are too expensive.” Vermaelen found that companies buying back their own shares had a better return over time. The most comprehensive US study shows an average additional return of 7 percentage points in the first year and 24 percentage points after four years. “This is particularly the case when management explicitly refers to the undervaluation of the share price. Our buyback fund has been around for ten years and outperforms the Russell 2000 Index – which includes small caps by 60%.” Ahold Delhaize, champion of share buybacks The champion of share buybacks on the Brussels Stock Exchange is more Dutch than Belgian. At the beginning of the year, Ahold Delhaize launched a EUR 1 billion share buyback programme. The retail giant is thus continuing a long tradition. More than half of the programme – 520 million euros – has already been completed. The parent company of Albert Heijn, Delhaize and online retailer is a cash cow. “We want to return the surplus capital to our shareholders. The fewer shares there are, the higher the earnings per share and the higher the dividend can be,” said CEO Frans Muller.

This year Colruyt has already bought 100 million euros worth of its own shares. The supermarket chain has not announced specific amounts, but is buying back its own shares ‘opportunistically’. When the share price falls, as it did after the announcement of disappointing results in June, Colruyt steps on the gas and buys back shares in spades. Its ‘red price’ policy therefore applies to its own shares. With 250 million euros of cash on the balance sheet, there is no shortage of means. At GBL, the CEO, Ian Gallienne, considers the holding’s discount (of more than a third compared to the intrinsic value) to be exaggerated. Other holdings such as Sofina or Brederode are trading above their intrinsic value. The son-in-law of the late Albert Frère talks about “balances” to justify his share buybacks. In September 2020, GBL launched its third share buyback programme in three years, of 250 million euros each. This week, the share price broke the 100 euro barrier for the first time. Sofina, which sporadically buys back its shares, broke the 400 euro barrier. Econocom has also been one of its biggest fans for years. In the first half of the year, the IT group bought back 72 million euros worth of its own shares, bringing its stake to 8%. Even during its recent slump, the company continued to pay a dividend and buy back its shares. Following an extensive restructuring, the company has finally returned to health and reduced its debt to almost zero.

In February, Econocom bought back a 6% package of shares from its reference shareholder Walter Butler, who resigned as a director, at a price of €2.285 per share. A masterstroke. Since then, the share price has risen by 30%. The Mittal family Aperam has just launched a 100 million euro buyback programme. Even though this plan has one remarkable feature: the Mittal family, which controls the steel group, will sell the same number of shares each day as Aperam has bought, at the same price. This will allow the family to keep the same level of ownership while cashing in on 100 million euros. In March 2020, following the outbreak of the Covid-19 crisis, Van de Velde ended its share buyback programme, but not for long. Despite the pandemic and the sharp drop in gross operating profit, the group’s cash position increased by 20% to almost 50 million euros. 50 million, enough to restart the buyback programme. This year, the group has already acquired 0.8% of its own capital. The buyback programme will continue until 4 September. Without a new programme, the share price will soon lose its stronghold.

Investors should keep an eye on the expiry date of these programmes. Because – and this is especially true for small caps – the end of these programmes is often synonymous with a drop in share price. 

Smartphoto holds more than 5% of its capital. Last year, the Wetteren-based photo gift group extended its €3 million share buyback programme launched last year until May 2023. A logical decision: the stock market value does not exceed 130 million euros. 130 million, so any large share purchase is likely to influence the share price. In just ten months, Smartphoto has acquired 1.2% of its capital. The company can easily finance this operation: last year, its cash flow increased from 8.2 to 13.2 million euros, despite the buybacks, the dividend increase and the construction of a new factory. Smartphoto can still spend more than €2 million on share buybacks under the current programme. In November 2019, its neighbour Resilux launched a €2.5 million share buyback programme, but has barely started. Last year, the PET bottle manufacturer bought back only 1,757 shares, for an investment of €250,000. They were immediately destroyed.

Banks are also considering starting to buy back their own shares. From the end of September, the European Central Bank will again give financial institutions a free hand to determine the amount of their dividends or buy their own shares. The ECB had restricted the distribution policy of banks at the beginning of the pandemic, so that they could use as much capital as possible for loans. KBC and ING announced this week on the release of strong quarterly figures that they were sharply increasing their dividends. ING will also buy shares for 1.7 billion euros. For KBC, it is still early days. In contrast, insurer Ageas – one of the champions of share buybacks in recent years – has scaled back its programme. The new CEO, Hans De Cuyper, wants above all to use the 1.2 billion euro cash mountain to finance acquisitions. He has promised to increase the dividend over the next three years, but at the “investor day” on 1 June he did not repeat the promise to buy back his own shares. For him, such buybacks are not a priority. “It remains a possibility, but it is not guaranteed,” he said. The market reacted negatively. Since this statement, the stock has lost 16%. The decline began well before the floods hit insurers hard. In May, Ageas destroyed 3.52 million shares bought back a year earlier, reducing the number of shares by 1.8%. The insurer still holds 2.13% of its capital. On 9 November 2020, image server specialist EVS ended its share buyback programme. At Euronav, the last share buybacks took place in December. The tanker owner explicitly points out that the share price is below the value of the assets. “Therefore, the share buyback creates long-term value for all stakeholders”, said the group’s management. In June, the General Meeting of Shareholders approved the renewal of the share buy-back programme to acquire up to 10% of the shares. At the end of 2020, Euronav held 8.3% of its own capital. In addition to buying back shares to be destroyed, companies buy back their own shares for a variety of reasons. Sometimes these shares are used to cover management or employee option plans. In this way, companies avoid the need to create new shares when options are granted. Since these shares are not destroyed, these purchases do not increase the return to shareholders. IBA, Barco, Care Property and Gimv, among others, systematically buy existing shares. Telenet takes the cake. Last year, the group spent 55 million euro…

“Many companies see share buybacks as a better way to return cash to shareholders than increasing the dividend.” THEO VERMAELEN PROFESSOR AT INSEAD AND THE UNIVERSITY OF CHICAGO

By buying back shares for its stock option plans. In addition, some companies buy and sell their own shares to improve the liquidity of the stock market. They often conclude a ‘liquidity contract’ with a broker. Ackermans & van Haaren, UCB, Atenor and, as of this month, Elia trade in their own shares. Sometimes companies sell large packages of their own shares, for example to finance their development projects or to reduce their debt. In the last 15 months, property developer Immobel has sold more than 1 million shares on the market, more than 10% of the total. This has temporarily depressed the share price. With this money, CEO Marnix Galle wants to move up a gear. He and Marc Coucke bought back these shares. Since the number of outstanding shares has increased by one third to 40% of the capital, Immobel can now attract more institutional investors.

Media group Roularta is the largest shareholder with 11.4% of the capital, but CEO Thierry Bouckaert said that the shares would not be destroyed. They can be used as a bargaining chip in case of acquisitions. Investors should therefore be aware of the motives of companies that buy back their own shares. They should also keep an eye on the maturity date of these programmes. Because and this is especially true for small caps – the end of these programmes often means a drop in the share price.

Theo Vermaelen, UBS Professor of Investment Banking, INSEAD.  Theo Vermaelen is also portfolio manager of PV Buyback USA, a fund that invests in firms that announce buybacks because they are undervalued.

Original paper:!preferred/0/package/832/pub/1054/page/20 

Theo Vermaelen

Theo Vermaelen

PV Buyback USA Fund Manager