Recently, a wave of stock buybacks has swept through Asian stock markets, with Japanese companies taking the lead in launching large-scale buybacks. China is also moving in the same direction, while South Korea has introduced a corporate &#34;value enhancement&#34; plan.
What are the similarities and differences between buybacks and dividends? What impact do buybacks have on companies? Which companies will be the biggest beneficiaries?
In its latest report in May, HSBC Strategy analyzed the recent buyback phenomenon. The buyback frenzy reflects favorable conditions such as high cash levels and low financing costs for companies, as well as management's confidence in the undervaluation of the company's stock price. They hope to release the company's intrinsic value by reducing the outstanding shares.
According to HSBC data:
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Japanese listed companies are expected to pay dividends totaling 13 trillion yen in 2023, in addition to a net buyback amount of 7 trillion yen, the total cash return is equivalent to 4.1% of market capitalization. South Korean companies are expected to pay dividends of 41 trillion Korean won in 2023, with a dividend yield of 2.1%, but almost no net buybacks. Mainland Chinese listed companies have a dividend yield of 3.4%, and the net buyback amount in 2023 exceeded the amount of new issuances for the first time.
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HSBC pointed out that the impact of cash distribution strategies on company value is worth further analysis:
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Dividends and buybacks are essentially returning funds to shareholders, but there are differences in operation. Dividends have a certain stickiness, with the market usually expecting to maintain a similar level; while buybacks are more flexible, allowing adjustments based on the company's cash flow situation, and changing the share structure and shareholder composition.
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Furthermore, buybacks affect stocks in two ways:
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First, they change the leverage level of the balance sheet, thereby affecting the weighted average cost of capital; second, they are seen as a signal from management that the stock is undervalued, affecting market expectations.
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Although China, Japan, and South Korea have all initiated buybacks, the levels of buybacks in the three major markets differ. Chinese and South Korean companies are expected to further increase their net cash returns:
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Buybacks in Japan have increased leverage, while in South Korea and China, the situation is the opposite. Many companies in South Korea and China conduct buybacks while issuing shares, and these companies often hoard more cash than Japanese companies. The net cash return rate in Japan (= dividends + buybacks - share issuances) is currently at 4%, while the return on invested capital (ROIC) in South Korea and China ranges from 2% to 3%, mainly from dividend payments.
In fact, the number of shares issued by South Korean and Chinese companies is higher than the number of shares they buy back, resulting in a negative buyback yield. This indicates that there is significant room for them to increase net cash returns, and the more structured buyback methods in South Korea and China may increase the return on invested capital by 2%.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b0a15990-890b-4873-8705-91247f32f287.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b0a15990-890b-4873-8705-91247f32f287.png"/>
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Additionally, HSBC pointed out that some cash-rich, low-leverage, and low-return-on-investment companies will be the biggest beneficiaries of this round of buyback frenzy

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HSBC pointed out that currently, Chinese and South Korean companies issue more shares than buybacks, indicating that they have a lot of room to increase net cash returns. The more structured buyback methods in South Korea and China may increase the return on invested capital by 2%

Is it a coincidence? China, Japan, and South Korea are all promoting buybacks!