Blog post: Taking a deeper dive into shareholder yield. “For centuries, dividends have served as the staple mechanism for returning cash to shareholders when companies had no better use for excess capital. However, over the last 20 years, buybacks appear to have become the new dividends, at least in the US.”
The article “Buybacks for US, Dividends for EU” from Verdad Capital discusses the contrasting approaches to shareholder returns between U.S. and European companies. In the United States, companies predominantly utilize share buybacks to return capital to shareholders. This method can boost earnings per share and potentially increase stock prices, benefiting shareholders, especially those with stock-based compensation. Despite the introduction of a 1% tax on share repurchases, U.S. companies announced over $1 trillion in buyback plans in 2024, indicating the continued popularity of this strategy.
In contrast, European companies, particularly banks, favor dividends as their primary means of shareholder returns. In 2024, European banks are set to deliver almost €123 billion in shareholder payouts, driven by increased dividends and buybacks elevated above their pre-financial crisis peaks. Major banks like HSBC, BNP Paribas, and UniCredit are leading these returns. This significant distribution results from robust profits due to raised interest rates, compensating for the absence of payouts during the Covid-19 pandemic.
The article suggests that these differing approaches are influenced by regional market dynamics, tax policies, and corporate cultures. While U.S. companies prefer buybacks to provide flexibility and tax advantages, European firms lean towards dividends, offering consistent income to investors.
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