Listed companies reward their shareholders by paying out a portion of their profits. Though cash dividends are the most common form of shareholder remuneration, an alternative are share buybacks. Here we tell you about them and their benefits for shareholders. 

What is a share buyback?

A share buyback is a form of shareholder remuneration where companies buy back their own shares to reduce their capital by cancelling the repurchased stock. While the number of shares in circulation falls, shareholders’ stake in the company and the amount they are due from future dividends increases.

The Board of Directors approved an interim dividend against the 2022 results of EUR 5.83 euro cents per share (up 20% on 2021) — 20% of the Group’s underlying profit for H1 2022.

What are the benefits of a share buyback?

Under regular market conditions, share buybacks can have these benefits:

  • First, since the company’s value remains the same but the supply of shares is lower, the share price will, in general, tend to increase. However, that depends on market behaviour. When the share price is lower than the tangible net asset value (TNAV) per share, the buyback will cause the latter to increase since there will be fewer shares in circulation (once the repurchased shares have been cancelled).
  • Second, the earnings per share (EPS) increases due to a reduction in outstanding shares. Shareholders will have a greater share in the company’s profits, which in turn makes the share price more appealing to investors. 
  • Third, shareholders who don’t sell their shares during a buyback don’t make a cash return and, therefore, don’t have to pay any tax.

Share buybacks enable companies to generate additional shareholder value. Under regular market conditions, the portion of profits that a company uses to buy back shares has a positive effect on the share price. 

For instance, a listed company has 1,000 shares of which a shareholder owns 100 (a 10% stake). The company runs a share buyback programme to purchase 100 shares, which reduces the total number of shares to 900. That shareholder’s stake will rise 1.11% to 11.11%, which means they will be entitled to a greater share of the profits.

 

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Banco Santander share buyback programme

Santander’s current shareholder remuneration policy dictates a remuneration target of circa 40% of the Group’s underlying profit (to be paid half through a cash dividend and half through a share buyback).1 On 27 September 2022, the board of directors approved an interim dividend against the 2022 results of EUR 5.83 euro cents per share (up 20% on 2021) — 20% of the Group’s underlying profit for H1 2022. Shareholders received the cash dividend on 2 November 2022. Also on 27 September 2022, the board approved a share buyback programme worth approximately EUR 979 million, or 20% of the Group’s underlying profit for H1 2022.  The programme began on 22 November 2022 under the terms of the announcement made on 21 November, which is available on santander.com and www.CNMV.es.

1 The shareholder remuneration policy is subject to future business and regulatory decisions and approval.

Positive impact of Santander’s buyback programme on its share price (as at November 2022)

With Santander’s share price below its TNAV, the board considers the share buyback a golden opportunity to create shareholder value.

In the first nine months of 2022, the Group reported a return on tangible equity (the ratio of underlying profit to average tangible equity) of 13.6%.  While the TNAV as at 30 September was EUR 4.31, the current share price is significantly lower. 

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