While British shares continue to act on extremely cheap ratings, two investor groups benefit. Private Equity companies take high-quality listed companies (especially in the small and mid-cap space) against bargain prices, and companies themselves are increasingly buying their own shares back. In the FTSE 100 LARGE-CAP index, about two-thirds of the companies in a certain year of stock buying are stock buying, while in the FTSE 250 companies that return their shares, the 42% of 42% in 2014 to 56% in 2024 has increased. The increase in buyback activity is even stronger for companies that are on the AIM procession.
The share of listed companies that buy back shares
Source: Panmure Liberum, Bloomberg
There is a lively debate about whether stock buying is working. The basic idea is that if a company returns the shares, the profit per share increases, even if the net profit remains the same. And higher profit per share should justify a higher share price. On the other hand, income -oriented investors claim that simply paying dividends is a better way to return cash to shareholders, because companies may be bad at timing their return and destroying the shareholders’ value if they buy too expensive shares, or evaporates the effect within the usual market noise.
In the past, I wrote About how business leaders are pretty good at timing their stock buying, but I also warned that investors should not believe every purchase announcement of the company share.
Now I have encountered a simple way to test whether companies in the UK (or rather, their brokers who carry out the return) are effective to buy back their shares: look at the legal announcements of return.
In the UK, companies usually issue an announcement at 7 a.m. (ie before the markets open) a comment how many shares they bought back the previous day and at what price. Dimitris Andriosopoulos Tested whether these announcements matter or whether they are just another part of the regulation that spam our mailboxes. According to his analysis, these announcements are much important. So much so that there are profitable trade strategies based on these announcements.
Below is a graph of the liquidity impact (measured as a bid-axle distribution) of the companies that buy back their shares. The left card shows the days around each individual purchase announcement of a company mentioned on the London Stock Exchange, while the correct graph only shows companies that have not bought shares in the previous two trading days (that is, they have only bought back every three days or less). As you can see on the right, liquidity increases considerably, not only on the day of the return, but for the two weeks after a return. The fact that there is no reduction in bid-axle spreads in the left graph is due to the fact that if companies buy back shares every day, the Bid-Akspread remains low, ie there is no compound effect of stock purchasing in a few days in a row. But back purchase certainly increases the liquidity of the shares.
Change in bid-axle spreads around stock buying
Source: Andriosopoulos (2025)
But it gets even better. The study provides immediate evidence that returns increase stock prices. Here is the abnormal return on the share price of companies that buy back shares compared to the FTSE All-Share Market Benchmark. As you can see, the daily surplus return varies between 0.1% and 0.5% (0.005 in the graph) in the days and weeks after a repayment announcement. Of course, the transaction costs of such a trade strategy are huge, so the study also looks at trade strategies with three to twenty days of retention periods and finds that these strategies would still offer outperformance between 7% and 50% per year before transaction costs.
Abnormal returns around stock buying
Source: Andriosopoulos (2025)
I am skeptical that this kind of outperformance would survive after transaction costs have been taken into account, but this study shows something very clear:
Back purchase is very logical and they actively increase the stock prices and liquidity of the stock market.
In comparison with dividends, the study reports that return is just as effective, if not anymore.
Business leaders in the UK have skill in determining the purchase.
The traders of the brokers who perform them back are the unfortunate heroes, because they add considerable value to the market capitalization of a company because of their timing and implementation skills.
#Return #buy #charm