Earnings per share (EPS), cash flow per share (CFPS), and return on equity (ROE) are common LTI measures that are transparent if based on statutory data and are at times used as a long term incentive (LTI) measure. A concern for investors is that these measures and others can be gamed by repurchasing shares instead of investing in the long-term prospects of the business. Share buybacks in the US have frequently been criticised for this reason where companies are accused of attempting to inflate EPS instead of investing in capital projects and R&D.

To test whether executives in Australian companies have repurchased shares in an attempt to inflate LTI measures and meet performance targets, we analysed the cash spending of ASX 100 companies from FY19 to FY21 and compared to our previous analysis of FY16 to FY18 cash spending found HERE.

After excluding three companies which de-listed during the period, 60 of the 97 companies (62%) in the sample had performance measures based on EPS, ROIC, ROCE or a cash flow measure which could benefit from share buybacks (referred to as “buyback measures” below).

If executives were forgoing investment opportunities to benefit their LTI targets, companies with these LTI measures would be expected to have spent a higher proportion of total cash outlays on buybacks relative to companies without such measures.

The companies sampled spent an aggregate of $378 billion on investments (capex, R&D and cash acquisitions) over FY19 to FY21. This was a 44% decrease from the $670b spent between FY16 to FY18. Dividend payouts increased by 26% to $245b. Share buybacks increased by 4% to $32b over FY19 to FY21.

Figure 1: ASX 100 total cash spending FY19 to FY21

During the period, the aggregate amount spent on investments increased from $99b in FY19 to $165b in FY21. Over the same period, aggregate annual distributions to shareholders in the form of dividends and buybacks decreased. The number of companies performing a buy back declined from 47 in FY19 to 32 in FY21. Similarly, the number of companies with a dividend distribution declined from 94 in FY19 to 84 in FY21.

The 60 companies with buyback measures accounted for $11 billion (36%) of total buybacks in the period of FY19 to FY21. The average proportion of cash outlay spent on share buybacks was 5.2% for companies that have buyback measures, and 4.7% for those that do not have buyback measures. That is, companies with buyback measures spent a higher proportion of their cash outlay on buybacks, compared to companies without buyback measures.

The opposite appeared to be true over FY16 to FY18. The changing trend was primarily driven by companies with buyback measures increasing their buyback proportion from 1.7% over FY16 to FY18, to 5.2% over FY19 to FY21.

After adjusting for the difference in market capitalisation, the proportion of total cash outlays spent on buybacks decreased from 5.2% to 3.3% for companies with buyback measures. This indicates that smaller companies spent a higher proportion of their cash outlay on share buybacks compared to larger companies.

Table 1: ASX 100 cash outlay by LTI measure

 

Table 2: Total cash outlay

 

For each company, the total cash outlay during FY19 to FY21 was proportioned by the amount spent on investments, dividends and share buybacks. As shown by tables 3 and 4, the companies with buyback measures spent relatively less overall, when compared to companies without such measures.

This differs from FY16 to FY18, where both companies with and without buyback measures spent a similar amount of investments, but companies with buyback measures spent relatively less on buybacks.

Table 3: Average proportion of total cash outlays spending purpose

Table 4: Market capitalisation weighted average proportion of total cash outlay

 

While companies with buyback measures have spent relatively more on buybacks over FY19 to FY21 compared to FY16 to FY18, there is no indication they are spending more on buybacks than companies without buyback measures. That is, it remains safe to say that ASX 100 executives have not tried to “game” these targets by returning capital to shareholders in the form of buybacks over dividends or forgoing long term investments.

Share buybacks can be an attractive alternative for listed companies to return capital to investors instead of paying a dividend, as long-term shareholders can choose to increase their claim on company’s assets relative to shareholders who sell their shares back to the company.

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