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Last update: 02/09/2024
Listed companies reward their shareholders with a portion of their profits. Cash dividends are the most common form of this reward. But some companies' shareholder remuneration offers up an alternative: the share buyback. Here we tell you about share buybacks and their benefits.
What is a share buyback?
A share buyback is when companies buy back their own shares from the market, cancel them and, ultimately, reduce share capital. With fewer shares in circulation, each shareholder gets both a larger stake in the company and a higher return on future dividends.
What are the benefits of a share buyback?
Here are some of the ways that buybacks work to shareholders' advantage under normal market conditions:
- First, since the company’s value remains the same but the supply of shares is lower, the share price will increase. However, that depends on market behaviour.
- Second, the earnings per share (EPS) should increase because fewer shares are in circulation. Shareholders will have a greater stake in the company’s profits.
- Unless a shareholder chooses to offload their shares, a buyback is a tax-free transaction.
Share buybacks enable companies to raise shareholder value. Under normal market conditions, the portion of profits a company uses to buy back shares should strengthen its share price.
Imagine a listed company with 1,000 shares, and 100 (10%) of them are held by one shareholder. The company runs a share buyback programme and purchases 100 shares, reducing total share capital to 900 shares. The shareholder, whose stake has just increased by 1.11% to 11.11%, is now entitled to more of the company's profits. Also, the share price should become more attractive to investors.
Banco Santander buyback programme and payout
The bank’s remuneration policy, in force since the 2023 Investor Day, stipulates a payout of around 50% of our underlying profit, split almost evenly between a cash dividend and share buybacks.
In August 2024, we announced a new share buyback programme worth EUR 1.525 billion (some 25% of the Group’s underlying profit for the first half of the year). The programme, which will run until 3 January 2025, is part of the first tranche of annual remuneration for our 3.5 million-plus shareholders.
On 24 September, the board of directors announced the amount of the interim cash dividend charged against the 2024 results: 10 euro cents per share, some 23% up on the 2023 dividend.
Total shareholder remuneration against the 2023 results was EUR 5.552 billion (some 50% of the Group’s underlying profit for 2023), split almost equally between a cash dividend and share buyback. That’s the bank’s highest payout since 2014.
Santander continues to achieve sustainable and profitable growth. A 23% increase in our cash dividend per share charged against the 2024 results is a shining example of the strength of our business model and strategy. We will continue to create shareholder value and expect to meet our 2024 targets, which we recently increased. That will mean over 6 billion euros in shareholder remuneration against the 2024 results. What’s more, after we pay this year’s interim dividend, we’ll have bought back over 12% of our shares since 2021.
