Several global banks – including HSBC, Santander and Barclays – have announced 2024 stock buyback programs. These banks had strong enough performances to put excess cash to use with buyback programs that seek to benefit the banks and their investors.
As an expert on financial institutions, corporate finance and capital markets, Gregory Nini, PhD, a professor of Finance in the LeBow College of Business, explained what buybacks are, how they work, and other options for excess profits.
What is a buyback?
A stock buyback is when a firm uses its cash to repurchase stock from existing investors. The investors who sell their shares back to the company receive cash in exchange for their stock. Firms often have “repurchase programs” where they announce their intention to repurchase a certain amount of stock. Then they make the actual purchases gradually trying to get the best price possible.
Why would a global bank (or any company) purchase its own stock?
Firms repurchase stock to return money to shareholders. In exchange for buying stock in a company, investors receive a claim to the future earnings of the firm. Firms can pay these earnings to investors through dividends or share repurchases. Dividends are regular payments of cash per share from a firm to all investors.
Banks have been increasing both repurchases and dividends.
What are the advantages or drawbacks of buybacks?
Relative to paying dividends, share buybacks have several advantages. Repurchases are more flexible because firms maintain discretion over the exact amount and payments to investors. Repurchases are also more flexible for investors since investors retain the option to sell their stock or not. Finally, share repurchases generate lower income tax than dividends.
In some cases, investors prefer dividends over repurchases because dividends can create a very stable source of income for investors.
Both dividends and buybacks remove some financial resources from firms, which can, in some cases, make it harder for the firm to make future investments. As a result, firms are very careful to manage how much money they return to shareholders.
Are there other options for using excess cash?
The two biggest alternatives are to invest the money or to save it for the future. For banks, their biggest investment option is to make loans to firms or individuals. Banks also save for the future by retaining a large portion of their earnings. Since the financial crisis, banks earnings have been well above their payouts to shareholders (dividends plus repurchases), as regulation required banks to build large capital buffers as protection against unexpected losses. At the height of the pandemic in 2020, regulations again limited banks’ dividends and share repurchases. When these restrictions were removed, share repurchases by banks increased notably.
Bank regulators continue to subject banks to stress tests to ensure that each bank has sufficient capital to withstand a severe economic downturn. Banks often increase their dividends and share buybacks after passing the stress tests.
Media interested in speaking with Nini should contact Annie Korp, assistant director, News & Media Relations, at 215-571-4244 or amk522@drexel.edu.
