UK share buybacks – what they tell us about valuations and dividends

Historically, the UK stock market has been a prime hunting ground for income investors. There’s a culture deeply embedded within many UK companies that, where possible, shareholders should be rewarded through dividends.

However, with UK shares continuing to trade on relatively low valuations, many companies are increasingly choosing to return capital through a different means – share buybacks.

The UK Discount

In recent years, the phrase "UK discount" has become increasingly common. The term refers to the tendency for UK-listed companies to trade on lower valuations than many overseas peers, despite operating high-quality businesses with similar growth prospects.

There are several possible explanations for why this is.

One is political uncertainty. Although the Brexit vote was more than a decade ago, international investors still often view the UK as a market facing structural economic challenges. This perception has weighed on sentiment, even though many UK-listed businesses generate a large proportion of their revenues overseas.

Another factor has been persistent investor outflows.

Both institutional and retail investors have steadily shifted money away from UK shares and towards markets perceived as offering stronger growth opportunities, particularly the US. Lower demand for UK shares has inevitably put pressure on valuations.

As a result, UK shares have often traded at a discount compared to companies in the US, Japan and, in many cases the rest of Europe. This is despite many businesses delivering similar levels of growth.

The growth of buy backs

Buybacks are where a company buys its own shares from the market and cancels them. With fewer shares available, and assuming the company’s prospects have not changed, the remaining shares should be worth more. It’s a tool used by companies that have excess cash and can add value for its current shareholders.

Buybacks are often most attractive when management believes the company's shares to be undervalued. In effect, the company is investing in itself.

This appears to be a growing trend in the UK market.

During the first half of 2026 alone, FTSE 100 companies bought back about £36bn worth of shares. That compares with approximately £13bn of buybacks carried out during the whole of 2017.

Importantly, there’s little sign that buybacks are slowing down. Companies like Shell, Barclays and Lloyds continue to generate significant levels of excess cash and have remained committed to returning capital to shareholders through buyback programmes.

Overseas buyers have also taken notice

It’s not only company management teams who believe that UK shares offer value. Overseas buyers and private-equity firms have also become increasingly active.

The number of takeovers involving UK-listed businesses has risen significantly in recent years. Since 2023, there have been more than 150 bids for UK companies valued at over £100mn, with many acquirers willing to pay substantial premiums.

This trend shows little sign of slowing.

Several sizeable deals have already been announced so far in 2026, with buyers prepared to pay significant premiums to secure control of UK-listed businesses.

For example, insurance company Beazley was bought by Swiss rival Zurich for £8.1bn, a 59.9% premium. American asset manager Nuveen bought UK asset manager Schroders for £9.9bn, a 34% premium. And UK airline easyJet has agreed in principle to be sold to private equity firm Apollo for £5.7bn, an 81% premium.

The rise in takeover activity provides further evidence that many investors believe that there’s a disconnect between market valuations and the true underlying value of UK companies.

Is this the end of dividends in the UK?

Although management teams have increasingly turned to buybacks as they seek to take advantage of depressed valuations, this has not come at the expense of dividends.

Instead, many UK companies now use a combination of dividends and buybacks to return capital to shareholders.

In fact, dividends remain a key attraction of the UK market.

Of the FTSE 100, 73 companies have increased their dividends in the past five years. This suggests that companies are not abandoning dividends. Rather, buybacks have become an additional tool that can be used alongside traditional cash distributions.

For some investors, this combination may prove particularly attractive. Although, past performance does not guarantee future returns.

Not only do UK shares continue to offer some of the highest dividend yields among major developed markets, but also companies are increasingly using buybacks to take advantage of valuations that many believe underestimate their long-term worth.

What this means for investors

The record levels of buybacks give an indication that companies believe that they are undervalued. This is backed up by the increasing number of takeover bids at sizeable premiums from overseas and private equity firms.

But for investors looking for income, buybacks haven’t replaced dividends. Many UK companies continue to offer attractive yields. Income is not guaranteed, though, and yields can rise and fall.

Three Fund Ideas for UK Income

A good way of investing into UK companies paying dividends is through UK Equity Income funds. So, here are three options investors could consider.

However, investing in these funds is not right for everyone.

Investors should invest only if the fund's objectives are aligned with their own and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest and make sure that any new investment forms part of a long-term diversified portfolio.

For more details on each fund’s objectives, its charges, and specific risks, see their factsheets and key investor information. These three funds take charges from capital, which can increase income but does reduce the potential for capital growth.