October 2025 Insights

Betting on Yourself

A company’s management will inevitably face the decision of whether to reinvest excess cash into new growth opportunities or to reward shareholders through capital returns such as dividends or share buybacks. Numerous studies have shown that most major merger and acquisition (M&A) deals tend to destroy value rather than create it. For instance, a KPMG study examining more than 3,000 public-to-public M&A transactions worth over $100 million between 2012 and 2022 found that 57% of acquirers ultimately destroyed shareholder value.

With fewer than half of M&A deals generating value-accretive returns for shareholders, many managers have shifted their focus towards returning capital to investors. While dividends were traditionally the preferred method, since 1997 the total value of share buybacks has surpassed the cash dividends paid by US firms, according to S&P Dow Jones Indices. This shift can be attributed to several factors, including favourable tax treatment, greater managerial discretion in conducting buyback programmes compared with dividend payments, and perhaps most cynically, the fact that buybacks enhance per-share metrics on which executive compensation is often based.

It is evident from the chart below that companies engaging in share buybacks have achieved higher total returns than those that have not, with the S&P 500 Buyback Index outperforming the total return of the S&P 500 by an average of 3.6% per year since 2000.

It is important to note that, despite this outperformance, investors cannot simply buy companies with large share buyback programmes without discernment. As Warren Buffett stated in his 2022 annual shareholder letter, “Gains from value-accretive repurchases, it should be emphasised, benefit all owners, in every respect.” The key phrase is “value-accretive”, as there have been many instances where share repurchase programmes have instead destroyed value. Once praised for its share buyback programme, technology company Intel has since come under scrutiny from analysts as it fell behind competitors in artificial intelligence (AI). These rivals, instead of repurchasing shares, chose to reinvest in their operations to capitalise on the significant opportunities ahead.

Buybacks also offer investors an element of indirect fraud protection, as companies that do not generate genuine cash flows are unable to repurchase shares in large quantities. Furthermore, share buybacks act as a filter on cash flow, since capital-intensive or financially struggling companies typically lack the capacity to repurchase their own shares.

At High Street, we believe that share repurchases can contribute significantly to total shareholder return, but only if the shares are being bought below their intrinsic value and do not come at the expense of the future organic growth of the business. Before concluding that a repurchase programme will create value for investors, we always assess the company’s forward growth prospects and its financial capacity to undertake such a programme.

Unless otherwise stated, all performance and statistical figures provided in this article have been pulled from Bloomberg by the High Street Asset Management Research Team on 29 October 2025 and all the images provided in this article have been sourced from FreePik and have been used in line with their Acceptable Use Policy. The contents of our newsletters are frequently sourced from or verified through our various product providers and other third parties. Although every effort is made to ensure the accuracy of the information contained in the newsletter, it should not be construed as financial advice as defined in the Financial Advisory and Intermediary Services Act. Links are provided to third-party websites for convenience only. High Street Asset Management (Pty) Ltd cannot accept responsibility and does not endorse any information contained on a third-party site. For our full disclaimer, please see: https://hsam.co.za/legal/.