The rise of buybacks marks the decline of dividends
23 JUL, 2025
By Peter van der Welle
- Share buybacks have become the preferred method of capital return
- Relief following the removal of the withholding tax from the US “Big Beautiful Bill”
- As bond yields fall, capital is shifting from credit to equities
The value of share repurchases has surged, reaching $1 trillion annually in the United States since 2021. This trend serves a dual purpose: avoiding the need for regular dividend distributions and artificially boosting earnings per share (EPS) and share prices. In certain jurisdictions, buybacks also enjoy tax advantages.
Annual dividends, paid as a percentage of equity holdings, have historically been the most traditional means of profit distribution to shareholders. The first recorded dividend payment was made by the Dutch East India Company in 1602. Dividends are often seen as a symbol of a company's financial health, with dividend cuts typically interpreted as signs of struggling profitability and a perceived lack of flexibility.
Structurally, since 2008, companies have increasingly preferred share buybacks. This is partly because buyback programmes are more flexible and often have defined timeframes. They also put less pressure on management teams compared to other uses of capital, such as investments or M&A activity.
Equity markets typically react sharply to dividend reductions, making companies reluctant to raise dividends even after periods of strong earnings.
The balance between dividends and buybacks can vary depending on national tax regimes. In the United States, buybacks are generally seen as more tax-efficient than dividend payouts due to the way they are taxed.
Regional Differences
Outside the US, share repurchase programmes have gained traction in Japan and Europe. In Japan, they accelerated after the Tokyo Stock Exchange announced in March 2023 that companies should improve capital returns to shareholders. This led to an increase in the average payout ratio from 57.1% in 2023 to 67.4% in 2024.
Lower stock valuations in Europe have also supported the growth of buyback activity. If European companies perceive their share prices to be structurally undervalued relative to other regions, redirecting excess liquidity to share buybacksmay seem sensible.
So far, buybacks have mainly been concentrated in the banking and energy sectors, but we may begin to see these activities extend to other industries as capital allocation becomes more disciplined across Europe.
A Notable Change in the “Big Beautiful Bill”
Investors have breathed a sigh of relief following the removal of the proposed withholding tax on dividends paid to foreign investors from the so-called “Big Beautiful Bill”. US lawmakers opposed the measure, fearing it could accelerate capital outflows if implemented.
Following the weaponisation of the US dollar during the early days of the war in Ukraine and former President Trump’s aggressive tariff policies, American exceptionalism is under more scrutiny than ever.
Some investors are already “voting with their feet”, as seen in the drop in foreign direct investment in the US and the decline in foreign holders of US equities.
The sudden repeal of this so-called “revenge tax” underscores the importance of investors not overreacting to initial political proposals from Trump, as they often get watered down or scrapped.
Dividends vs Bond Coupons
With the threat of the withholding tax removed, investors are likely to continue shifting from bond yields to more consistent income streams provided by dividends. While dividend payments tend to rise steadily, bond yields have declined due to falling interest rates.
Investors seeking regular cash payments – such as retirees – still find both bond coupons and dividends attractive. As interest rates and expectations around them have begun to decline, we are witnessing a shift from fixed income to equity income, as evidenced by fund flows over the past 18 months.
At this stage in the market cycle, alternative income strategies such as using covered calls to monetise potential price gains are becoming more appealing. During periods of higher market volatility, and when premiums are attractive, we aim to identify tactical opportunities to sell call options as part of our income strategies. While this may limit upside potential, it can enhance income generation, provide more stable distributions, and offer some downside protection.
