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24 Apr 2024

  Artemis | UK Equities

Artemis: Why increasing share buybacks are a positive signal for UK equities

Mark Niznik, UK smaller companies strategy

UK equities may be out of favour with global asset allocators, but there is one set of investors who are snapping them up at a rate rarely, if ever, seen before.

FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS. CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.

More and more company management teams are announcing share buybacks. And they are not confined to the FTSE 100 juggernauts. Increasingly, smaller companies too are deploying cash to buy up their own shares.

Last year, 30 companies listed on the FTSE All-Share saw their total number of shares fall by 5% or more and this was to a large extent due to buybacks1. In three years, 27 companies have purchased 10% or more of their own shares. In 2023, roughly one in eight smaller companies listed in the UK bought back their own shares.

In our own small-cap portfolio, we saw 11 companies engage in share buybacks last year. In 30 years as a small-cap investor, I have never seen this level of buybacks among the UK’s smaller companies.

The key question is, of course, whether this is good news for investors. Some insist they would rather see profits returned as dividends. However, we take the view that what matters to our investors is the total return – and buybacks can play a useful role in bolstering capital growth.

This share price appreciation can also be more tax-efficient for investors, because capital growth is typically taxed at a lower rate than income. If an investor needs income, they can always sell some shares.

There is another reason for investors to be positive about buybacks. Analysis reveals that since 2016 the 20% of FTSE SmallCap companies spending the most on buybacks as a proportion of their market capitalisation have delivered in the region of double the return for the overall index2.

Need for vigilance

Critics often level the claim that management teams can use buybacks as a tool to inflate their company’s earnings per share (EPS) – and thus their own remuneration, which is often linked to EPS. This underlines the need for vigilance and we keep a sharp eye out for any unsatisfactory practices.

Another potential issue is companies buying back shares when the price is high. While this benefits sellers, long-term investors may not see it as the most effective way for a company to deploy excess cash.

However, with the UK market unloved and good quality companies languishing on the valuations we are currently seeing, we are more than comfortable with businesses buying back shares.

Vote of confidence

The UK is firmly out of favour with global investors, with price/earnings multiples close to the lows of 2008/9 and at similar levels to when the world was grappling with COVID-19 in 2020.

Valuations look particularly cheap among smaller companies, despite historical data that shows strong outperformance by these smaller companies versus their larger counterparts. The Deutsche Numis Indices 2024 Annual Review shows that between 1955 and 2023, the DNSC 1000 index (excluding investment trusts), which represents the bottom 2% of the main UK market, achieved an annualised return of 15.6%. The Deutsche Numis Large Cap Index (excluding investment trusts) delivered annualised growth of 11% over the same period.

The view among global asset allocators seems to be that the UK and its companies are floundering and that, buffeted by elevated inflation, higher interest rates and economic uncertainty, smaller companies in particular are struggling.

However, this is at odds with what we are hearing first hand in our meetings with the management teams of the majority of companies we hold in the fund and those we are talking to with a view to possible future investment. In many cases, they are reporting robust trading and continuing growth.

We take the view that nobody understands these companies better than the people managing them on a day-to-day basis. If they believe their shares look undervalued and are buying them back on behalf of the company then we view this as a strong vote of confidence.

Share buybacks also serve to remind us that not all smaller companies have high levels of debt on the balance sheet. The reality is many are producing excess cash, a fact which we see as further reinforcing the investment case for UK smaller companies.

We see a strong long-term opportunity in UK equities and particularly in smaller companies. The increasing number of share buybacks underlines the value that those who understand these companies the best – the management teams running them – see in their businesses. In our view this is a very positive signal for investors.

1This list does not include investment trusts, some of which have discount control policies which force them to buy back shares when discounts widen. Source, Bloomberg
2Sources, Liberum and Datastream

Capital at risk. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.

This is a marketing communication. Before making any final investment decisions, and to understand the investment risks involved, refer to the fund prospectus (or in the case of investment trusts, Investor Disclosure Document and Articles of Association), available in English, and KIID/KID, available in English and in your local language depending on local country registration, available in the literature library.

Risks specific to the Artemis UK Smaller Companies Fund

  • Market volatility risk: The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
  • Currency risk: The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.
  • Smaller companies risk: Investing in small and medium-sized companies can involve more risk than investing in larger, more established companies. Shares in smaller companies may not be as easy to sell, which can cause difficulty in valuing those shares.

Investment in a fund concerns the acquisition of units/shares in the fund and not in the underlying assets of the fund.

Reference to specific shares or companies should not be taken as advice or a recommendation to invest in them.

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Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness.

Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.

Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit artemisfunds.com/third-party-data.

Important information
The intention of Artemis’ ‘investment insights’ articles is to present objective news, information, data and guidance on finance topics drawn from a diverse collection of sources. Content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or investment by Artemis or any third-party. Potential investors should consider the need for independent financial advice. Any research or analysis has been procured by Artemis for its own use and may be acted on in that connection. The contents of articles are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current opinions, expectations and projections. Articles are provided to you only incidentally, and any opinions expressed are subject to change without notice. The source for all data is Artemis, unless stated otherwise. The value of an investment, and any income from it, can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested.


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