Activist demands for companies to return cash to their shareholders are up worldwide. But their approach is quite different in the U.S. and Japan, the two biggest activist markets. In the U.S., while buybacks remain the most popular means to return cash, dividend demands appear to be rising at a faster pace. In Japan, demand for buybacks has surged while dividend demands have cooled year to date.

The shift in the U.S. comes as companies are buying back shares at record levels, combined with regulators imposing a new tax and increased disclosure on such buybacks. In Japan, however, some companies appear to be reverting to their old habit of hoarding cash, sparking a fresh wave of complaints from shareholders.

American dividends

In the U.S., 10 companies faced buyback demands as of May 15, according to Insightia’s Activism module, up from nine at the same time in 2022, but lower than any year since 2019.

On a full year basis, activist buyback demands have been steadily declining from 31 in 2019 to 25 last year.

By contrast, there have been five dividend demands, up from just one this time last year, and the highest year-to-date level seen since at least 2018.

With S&P 500 companies having spent $922.7 billion on repurchases in 2022, up from $881.7 billion in 2021, and more than twice the amount in 2012, according to S&P Dow Jones Indices, activists may find less justification for buybacks.

The growing political pressure on companies to reconsider buybacks may also be part of the equation. On May 10, the Securities and Exchange Commission (SEC) adopted amendments requiring issuers to disclose daily repurchase activity on a quarterly basis or semiannually; including more details on directors and officers traded and “narrative disclosure” about the issuer’s repurchase programs and practices.

“The rule will strengthen investors’ ability to monitor buyback activity’s coherence with business strategy and D&O trades,” said Glenn Davis, director of research at the Council of Institutional Investors. “In turn this should sharpen focus (both among managers and activists) on whether companies’ existing buyback practices make long-term economic sense.”

The move followed the introduction of a 1% corporate tax on buybacks imposed as part of the Inflation Reduction Act and is effective for stock repurchases made after the end of December 2022. While the 1% tax is currently not seen as a material deterrent to companies issuing buybacks, there are proposals “floating around Washington” to boost the level to 4%, according to Professor Jesse Fried at Harvard Law School, who specializes in buybacks and corporate governance issues.

“Leading Democrats have come to hate buybacks; they think that the economy will somehow benefit if the tax code is used to make them too expensive,” he told Insightia in an interview. “I think it’s exactly the opposite,” he added, noting that buybacks help move capital from mature public firms to smaller public firms and private firms, stimulating investment and hiring. “Taxing buybacks will thus harm the economy.”

Buying back Japan

So far this year there have been 27 demands for buybacks at Japanese companies, up from 21 at the same time in 2022 and just three in 2021. Buyback demands in Japan have been rising for several years, from nine in total in 2019, to a record 36 for all of 2022.

By contrast, 20 Japanese companies have faced dividend demands so far this year, down from 23 at this time in 2022.

CLSA Japan strategist Nicholas Smith believes that the surge is due in part to Japanese companies backsliding on earlier promises to reduce their famously high cash holdings. According to Smith’s estimate, announced Japanese buybacks are 10% to 15% behind where they were in May 2022.

“[Cash levels] were being brought down by activism,” Smith told Insightia. “And then you had the pandemic, and the pressure was taken off and the activists may now be regretting the lack of pressure.”

He suggested that more Japanese managers are resisting buybacks this year due to concern about the economic outlook, and fear of increased government scrutiny. Indeed, when the current Japanese Prime Minister Fumio Kishida took office last year, he made comments indicating a desire to see greater restrictions on buybacks, on grounds the money should be used to fund corporate expansion and employee wages.

The proposal sparked widespread criticism from the Japanese investment community, Smith noted.

Activists like buybacks

Political opposition may be rising, but there is little chance that activists will ever fall out of love with buybacks. Along with being more tax friendly and requiring less back-office work for shareholders than dividends, buybacks have long been proven as an easy way to push up share prices, at least in the short term.

Bowing to pressure from Alta Fox, transportation company Daseke announced a new buyback on September 20 last year and saw its share price rally almost 40% over the next five months, before falling below the buyback price.

The Tile Shop saw its share price rise almost 50% in the six months following an August 16 buyback announcement prompted by activist Kanen Wealth Management. The stock continues to trade 10% higher than its closing price the day before the announcement.

And in Japan, Central Glass saw its share price rally 23% in the two months following a September 20 buyback announcement as part of an agreement with activist Murakami and C&I Holdings Co.

“There are only two ways to distribute cash: dividends and repurchases,” noted Fried. “And if there are impediments to distributing dividends, the money will come out through repurchases.”