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Stock buybacks like BP’s should lead to European stocks outperforming the US – GBAM

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The cumulative effects of share buybacks, since the 1980s, have been identified as the critical factor allowing the US stock market to outperform Europe on a 100+ year basis – a significant view, given the announcement by BP plc (LON:BP) to boost its buyback program by an additional $2.5 billion.

With the largest proportion of European companies in history ready for takeovers, returns for investors in the region could start to outperform the United States in coming years, according to analysis presented at the latest meeting quarterly investment report from the Group of Boutique Fund Managers (GBAM)* .

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Q1 2022 Hedge Fund Letters, Talks & More

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Presented by Hlelo ‘Lo’ Giyose, CIO and Executive Vice President of Johannesburg-based GBAM Fellow First Avenue Investment Management, the analysis sought to establish the primacy of share buybacks (capital allocation) in stock picking in a world where global investors are obsessed with switching tactically between US and European equities.

While comparing the Stoxx 600 and S&P 500 indices for those contemplating a tactical shift, the analysis referenced both longer and closer time frames: 1900-2011, 1988-2011 and 2010-19.

Factors dismissed as insufficient to explain levels of performance gaps over time include:

  • Profit growth rate
  • Sector composition and weighting
  • Notional P/E ratios
  • Impact of depreciation accounting differences between US GAAP and IFRS on REITs and consumer discretionary sectors

Data for both regions since January 2021 point to stronger returns from indices such as the Solactive European Buyback and S&P 500 Buyback, compared to the Stoxx Europe Select Dividend 30 or S&P 500 Dividend Aristocrats.

Shell, BP and Total are in a difficult position

Lo Giyose said: “What’s really intriguing here is that much of the difference in performance between the US and Europe can be explained by companies more consistently allocating capital to one particular factor, namely share buybacks.”

“Thinking of Shell PLC (LON:SHEL) and BP and TotalEnergies SE (LON:TTE), they are in a difficult position. But let’s say there was no war, no supply constraints. If they followed ESG principles by reducing fossil fuel production and increasing renewable energy and buying back shares and trading at 5.7% dividend yield, these would be exceptional investments.

“Paying dividends is one thing. But buying back shares is far superior to simply redeeming shares. Companies that also buy back stock on a regular basis over a period of time outperform companies that only pay dividends. »

After/…

“Buying and deleting 10% of issued stock is compounded at a much faster rate than paying a dividend each year.”


About the Group of Boutique Asset Managers (GBAM)

GBAM is a global network of like-minded independent specialist asset managers who have come together to enhance their presence in international markets. GBAM describes boutique businesses as having a limited product line, a close relationship with customers, and a relatively flat organizational structure. GBAM companies tend to be small to medium sized, entrepreneurial, flexible and responsive to changing market conditions. Members tend to focus on manufacturing investment products rather than mass distribution. Ownership tends to be in the hands of the founding partners.

GBAM investment professionals describe themselves as innovative craftsmen who take a creative yet focused approach to fund management with a passion for “doing the right thing” for their clients. They have the freedom to manage, are driven by performance cultures and pride themselves on the intellectual rigor they bring to asset management. Because of the satisfaction they get from working in a GBAM store, they tend to stay with their business for long periods of time.

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