Australian share buybacks have soared to $36bn. Is this the best use of companies’ profits?

ASX 200 companies have spent more than $36 billion on share buybacks over the last three years, new CEDA analysis has found, as firms prioritised returns to shareholders despite the need for key long-term investments.

Using data scraped from ASX announcements, we found the total amount spent by ASX 200 companies on share buybacks from 2021 to 2023 was equivalent to the market value of the 18th largest ASX-listed company.¹ 

Banks have dominated Australian share buybacks since 2021. We found the major banks currently represent 18 per cent of the ASX 200 by market capitalisation but were responsible for more than 50 per cent of buybacks over the past three years (Figures 1 and 2).

A share buyback is when a company re-purchases its own shares, either from the market or directly from shareholders. Buybacks reduce the number of available shares, giving a short-term boost to a company’s share price. For shareholders who retain shares, this increases their earnings per share.

We acknowledge that companies view buybacks as a valid strategy for capital management when the capital is no longer needed for other investments. This article argues that companies need to prioritise spending capital for long-term investment.

Buybacks can be good for the economy if they put financial resources to more productive uses, such as investing in emerging firms or technologies. Australian companies are not alone in taking this path, global buybacks reached a record high in 2022. But our analysis suggests companies undertaking some of the biggest buybacks are diverting resources away from productive uses such as capital investments.

For example, Qantas has been criticised for spending more than $1 billion on buybacks since 2021, resources that could be committed to long-term investments such as upgrading its fleet. The average age of the Qantas fleet has grown from 7.7 years in 2014 to 14 years in 2022, according to UBS. This is older than the average age of aircrafts around the world and significantly older than competitor fleets across the Asia-Pacific.

Australia is the only major OECD economy that has had a fall in gross expenditure on research and development (R&D) as a percentage of GDP – down from 2.09 per cent in 2014 to 1.68 per cent in 2022. Business spending on R&D as a share of GDP is below one per cent and has been slowly declining from 2014. On average, ASX 200 companies spend just three per cent of their revenue on R&D. This has negative consequences for productivity and living standards.

At the same time, there are signs investors have become more focused on short-term returns. The ASX reports that Australian investors are becoming more active, indicating a reduction in stock-holding periods. Around 40 per cent of retail investors now monitor their investments weekly. In 2000, retail investors traded less than twice a year on average, while in 2023 the average number of trades had increased to 12.

The significant decline in average holding periods has put pressure on listed companies to cut investment and long-term growth for the sake of immediate profits. Reflecting this shift, there are concerns firms are undertaking buybacks due to increased pressure from shareholders for short-term returns.

The major banks spent around $20 billion on share buybacks between 2021 and 2023, up from $4 billion over 2015 to 2020 (Figure 3). On top of their record profits, the major banks received approximately $122 billion through the Reserve Bank’s Term Funding Facility (TFF) at low interest rates as part of the monetary policy response to the COVID-19 pandemic. The TFF was designed to support borrowers via increased loans and lower interest rates. 

The major Australian banks undertook these buybacks even as they required major investments in IT systems due to their reliance on legacy systems. While they do already invest a lot in IT, the sector has faced a wave of digital disruption and cyberattacks, with Westpac, ANZ and Commonwealth Bank all experiencing high-profile outages in 2023. Updating and upgrading IT systems will be critical to preventing future attacks and requires ongoing investment.

Encouragingly, there are reports that investment in technology is occurring, with Westpac committed to spending $2 billion annually to rebuild its IT system after 15 years of underinvestment, but more is needed.

The banking regulator APRA has highlighted gaps in many financial institutions’ management of cyber and information security risks: failure to identify critical and sensitive information assets; inadequate testing of control programs; outdated incident response plans and limited assessment of the security capabilities of third-party IT service providers. More than one-third of staffing is outsourced by all banks and firms rely on overseas or third-party providers to manage their IT infrastructure. All of this suggests there is a significant need for investment in IT infrastructure.

Companies play a pivotal role in shaping the trajectory of the Australian economy. They should carefully consider how they allocate their resources to ensure sustained growth and resilience amid evolving challenges, focusing on executing strategy, investing in R&D and new products, and other projects to boost profitability and wealth over the long term.

And investors should prioritise genuine value creation over value extraction. If they continue to prioritise short-term returns over long-term investments, our productivity growth and living standards could suffer.

^{[1] as of January 10, 2024}