(Bloomberg) -- Morgan Stanley strategists may have found a way in which Europe’s stocks are surpassing the U.S.
European companies’ equity buybacks have surged to a record $100 billion over the past 12 months, with the strategy beating the returns of U.S. counterparts over the past five years, according to Morgan Stanley. The strategy is also rewarding company stocks more than the payment of high dividends, according to the bank.
“This is the first time we have seen strong buyback performance outside of bear markets or recessions,” strategists led by Graham Secker wrote in a note Tuesday. “More striking, our net buyback factor has shown much greater efficacy in Europe than the U.S. over all time frames.”
One of the reasons European stock repurchasers are faring better is that the practice is less common in the region than among American firms, said the strategists. Buying back equity can provide a much-needed boost to the world’s most-shorted equities, which have been seeing almost non-stop outflows for more than a year amid sluggish economic growth and political uncertainty. Doing so should boost earnings growth, trading liquidity and demand for shares, Morgan Stanley wrote.
European high dividend payers, on the other hand, have been lagging behind their lower-payout peers for the past five years. That has fueled debate about the sustainability of high dividend yields at some companies. Morgan Stanley recommends that such firms switch to buybacks instead. Despite the prevalence of negative bond yields, and a large proportion of stocks in the MSCI Europe index offering dividend yields exceeding 5%, investors aren’t chasing after high dividends, the strategists said.
One of the reasons for the performance discrepancy, according to Chris Bailey, a European strategist Raymond James, is that buybacks are associated with strong balance sheets and stable revenue, whereas many high dividend payers have struggled to maintain payouts.
“Buyback shares are names that are showing corporate progress and have the flexibility and the balance sheets to continue return money to shareholders. That unsurprisingly is taken thematically quite well given the current low-growth European backdrop,” said London-based Bailey.
Still, he warned, European stock investors used to higher dividend yields may not take kindly to sudden cuts in payouts in favor of buybacks.
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