Goldman Sachs says these global companies are poised to return more cash to shareholders

Published Thu, Jun 16 20228:47 PM EDT

Share buybacks are on the rise, according to Goldman Sachs , with the investment bank naming a raft of European companies that it thinks are ready to accelerate the pace of shareholder returns. Share buybacks, also known as share repurchases, are when a company buys back its own shares from the stock market. This boosts the company's earnings per share, given the smaller pool of shares outstanding, possibly enhancing the value of the stock. Goldman noted that buybacks also provide downside support for stocks, since companies can step in to repurchase shares when their stock prices tumble. Amid the massive sell-off in global markets this year, share buybacks have become an attractive option for corporates to boost their earnings per share, as companies are now able to repurchase even more shares than usual given the steep decline in prices. "The number of times companies mention 'buybacks' during the quarterly earnings call has increased fourfold over the past cycle and is now at an all-time high," Goldman's strategists, led by Guillaume Jaisson, said in a research note on Jun. 13. As such, the percentage of European companies engaging in buybacks this year is likely to reach an all-time high, he added. The bank believes buyback activities will be supported by high corporate cash levels, strong balance sheets, attractive valuations and corporate insiders buying the dip. How investors benefit As the prospect of slowing economic growth becomes more apparent, Goldman expects investors to focus on inflation and reward companies able to return excess cash to shareholders through buybacks and dividends. "Share repurchases provides an extra yield, which is another way to return money to shareholders," Jaisson said. "Looking at different buyback indices, we find that they have generally outperformed the market over the long run," he added. Goldman's basket of companies with high net buyback yield includes ArcelorMittal , which has a net buyback yield of 16.9% in the financial year 2021. U.K. bank NatWest also made Goldman's basket with a net buyback yield of 7.9%, while French real estate group Aroundtown and British advertising giant WPP had yields of 7.6% and 7.1%, respectively. Goldman noted that the median company in the basket bought back 6.3% of its market cap over the past three years, with most of those companies planning to continue buying back their shares in the medium term. Goldman also highlighted several stocks it thinks could announce more buybacks. In particular, the bank believes the energy and basic resources sectors could see the highest buybacks — given the sectors' high free cash flow yields and managements' stated intentions to return cash to shareholders. "With healthy balance sheets and higher commodity prices, these companies are likely to focus on buybacks once their dividends are paid," Jaisson said. The energy and basic resources stocks that made Goldman's list include Shell , Equinor , TotalEnergies , BP , ArcelorMittal and Holmen . Other stocks that Goldman believes could announce more buybacks include L'Oreal and Kering in consumer goods and services; Novartis and Sanofi in health care, as well as HSBC , UBS and Banco Santander in financial services.