Buybacks vs. Dividends: The Battle for Shareholder Value

In South Africa’s dynamic financial landscape, companies returning capital to shareholders must carefully choose between share buybacks and dividend payouts. While buybacks have gained traction globally, dividends remain a traditional favorite among South African corporates. The decision between the two is not merely a financial one—it is influenced by a company’s financial position, tax considerations, and investor expectations. In this article, we explore the circumstances under which share buybacks are more effective than dividends and vice versa, using insights from leading South African corporations.

Why Share Buybacks Matter

Share buybacks occur when a company repurchases its own shares from the market, reducing the total number of shares outstanding. This strategy can create shareholder value in multiple ways. If a company believes its shares are trading below intrinsic value, buybacks provide an opportunity to enhance long-term returns.

Moreover, reducing the number of shares outstanding has the effect of improving earnings per share (EPS), which can boost stock prices and investor confidence. Unlike dividends, which create an ongoing expectation from shareholders, buybacks offer a degree of flexibility, allowing management to return capital only when it makes strategic sense.

Case Study: Naspers – South Africa’s Biggest Buyback Program

Naspers (JSE: NPN), one of Africa’s largest companies, has aggressively repurchased its shares in recent years. The company’s buyback program is one of the largest in South African corporate history, aimed at closing the discount between its market value and the underlying value of its assets, particularly its stake in Tencent.

Buybacks have worked well for Naspers because the company’s sum-of-the-parts valuation revealed a massive discount, making repurchasing shares an effective value-creation strategy. By reducing the number of outstanding shares, Naspers sought to improve its market perception and unlock long-term value for shareholders. However, not all investors agreed with the strategy, as some argued that spinning off more assets would have been a more effective way to close the valuation gap.

When Share Buybacks Are Superior

Buybacks tend to be the better option when a company’s stock is undervalued, as repurchasing shares at a discount can provide strong long-term returns. They are also effective when a company has excess cash but lacks attractive reinvestment opportunities, preventing capital from being deployed inefficiently. Many companies also use buybacks to optimize their capital structure, reducing equity dilution or improving financial ratios. Additionally, in markets where dividend tax rates are high, buybacks offer a tax-efficient way to return capital to shareholders.

Why Some South African Companies Prefer Dividends

Despite the rise of buybacks, dividends remain the preferred choice for many South African firms. Dividends are particularly appealing to income-focused investors, including pension funds and retirees, who rely on them as a stable source of cash flow. Companies with strong and predictable cash flows, such as those in the banking, telecoms, and consumer goods sectors, often use dividends to signal financial strength and stability.

Beyond financial considerations, dividends also play an important role in investor trust. South African investors have historically favored dividends as a reliable indicator of corporate health, making companies that regularly distribute dividends more attractive to long-term shareholders. Additionally, given the socio-economic challenges in South Africa, some companies avoid buybacks to prevent regulatory or political scrutiny, as aggressive share repurchase programs may be perceived as prioritizing shareholders over business investment and employment growth.

Case Study: Standard Bank – A Dividend Powerhouse with Growth Challenges

Standard Bank (JSE: SBK), one of South Africa’s largest financial institutions, has consistently prioritized dividends, making it a favorite among income-focused investors. With strong, predictable cash flows, the bank can sustain generous dividend payments while maintaining operational stability.

However, this strategy has done little to support Standard Bank’s share price performance which has been weak compared to high-growth companies. While dividends provide stable returns, they do not contribute to share price appreciation in the same way that reinvestment into high-growth projects or well-timed buybacks might.

Unlike tech or fast-expanding companies that reinvest earnings into innovation, acquisitions, or expansion, Standard Bank has focused on returning excess capital to shareholders. While this has built long-term investor confidence, it has also limited the stock’s growth potential. Investors seeking capital appreciation may prefer companies that balance dividends with reinvestment into strategic initiatives or buybacks when stock valuations are attractive.

A case could be made that Standard Bank—and other large South African dividend payers—could increase shareholder value by slightly reducing dividends and directing more capital toward:

• Share Buybacks – Reducing the number of outstanding shares to boost EPS and improve market valuation.

• Expansion & Innovation – Investing in high-growth fintech, digital banking, or African market expansion.

• Strategic Acquisitions – Acquiring complementary businesses to diversify revenue streams and enhance long-term profitability.

  
  

Many global banks, such as JPMorgan Chase (NYSE: JPM) and Goldman Sachs (NYSE: GS), have historically used a mix of dividends, buybacks, and reinvestment. Their stock performance has been stronger than purely dividend-focused banks, as they ensure earnings are deployed efficiently across multiple strategies.

This highlights an important lesson: dividends can be a double-edged sword. While they attract passive-income investors, they can also limit a stock’s ability to grow over time if capital is not being reinvested for expansion or share optimization.

Balancing Both Strategies

Some South African companies adopt a hybrid approach, using both dividends and share buybacks to maximize shareholder value. This approach allows them to maintain stable dividend income for traditional investors while executing buybacks when their stock is undervalued.

A prime example of this strategy is MTN Group (JSE: MTN), Africa’s largest telecom company. MTN pays consistent dividends, attracting income investors while also occasionally repurchasing shares when market conditions favor it. Despite returning significant capital to shareholders, the company continues to reinvest heavily in its 5G and fintech businesses, ensuring future growth. This strategic balance allows MTN to appeal to both growth-focused and income-focused investors while maintaining financial flexibility.

Final Thoughts: Choosing the Right Strategy in South Africa

For companies operating in South Africa, the choice between share buybacks and dividends isn’t a one-size-fits-all decision. Each company must assess its stock valuation, cash reserves, investor base, and regulatory environment to determine the most effective capital return strategy.

Buybacks make the most sense when a company’s shares are significantly undervalued, when tax efficiency is a priority, or when there are limited reinvestment opportunities. On the other hand, dividends are preferable for companies seeking to attract long-term, income-focused investors, maintain stability in volatile markets, or avoid political and regulatory scrutiny.

At LEVRG, we identify companies that have the potential to create significant shareholder value by making more strategic capital allocation decisions, particularly when it comes to dividends and buybacks. Many South African firms could enhance their market valuation and investor appeal by optimizing their capital return strategies—whether by adjusting dividend policies, implementing opportunistic buybacks, or reinvesting in high-growth opportunities. Our approach focuses on uncovering businesses that are undervalued yet fundamentally strong, where smarter capital allocation can unlock long-term profitability and sustainable investor returns.