(BFM Bourse) – Many members of the index announced share buyback programs when publishing their annual results. This form of shareholder return offers welcome flexibility in uncertain times.
The harvest will have been fruitful for the groups of the CAC 40. The results season has just ended, with a total of 138.7 billion euros in profits, and no group belonging to the famous index has lowered its dividend to title of the 2022 financial year. For most of them, it has even progressed significantly.
But the dividend is not the only form of shareholder return. Many groups have also announced when publishing their results or shortly after, such as LVMH, share buyback programs. This is the case, among others, of Axa, Carrefour, BNP Paribas, Stellantis, TotalEnergies and even Saint-Gobain.
Based on the various company announcements, BFM Bourse has identified a total of 12.9 billion euros in announced share buyback programs, the lion’s share of which goes to BNP Paribas with 5 billion euros, including a just over 4 billion euros are linked to the sale of its former American subsidiary Bank of the West.
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A flexible tool
It’s a safe bet that the total amount of share buybacks will be higher than the dozen billions already announced for 2023. Last year, TotalEnergies announced 2 billion dollars in share buybacks at the start of the year. year and has, quarter after quarter, increased its operations to reach 7 billion over the whole of 2022. For 2023, the oil group expects to make 2 billion dollars in the first quarter of 2023 alone.
Why does the CAC 40 use this shareholder return method? “The 2021 and 2022 results of the CAC 40 groups have, for many reasons, been very good. These companies are thus able to make significant investments while maintaining high liquidity. However, for some companies, investments are constrained. For example, and to simplify, LVMH does not necessarily have an interest in opening yet another store in Saint-Tropez, hence the question of how to use the cash and therefore return it to the shareholders, since these are companies that have very little debt to repay”, explains Pascal Quiry, co-author of the financial review Vernimmen and professor at HEC.
“The other reason for these share buybacks is related to the economic climate which, due to high inflation, remains very uncertain. In this context, companies avoid increasing the dividend too much because they would risk having to reduce it to title of 2023 or 2024. They thus have more recourse to share buybacks, because they do not entail any implicit commitment of recurrence, unlike the increase in the dividend. It is therefore a flexible tool for returning to shareholders”, continues the finance specialist.
A recent increase in share buyback operations in Europe
This trend observed at the start of 2023 confirms an already dynamic 2022 in Europe. According to a count kept by BNP Paribas, share buybacks in Europe by companies almost doubled last year, standing in nominal value at 161 billion euros in against 84 billion in 2021. The bank has based on 425 “large caps” in Europe in eleven countries.
According to broader figures from Bernstein, cited this time by the Financial Times, share buybacks in Europe reached around 350 billion dollars in 2022, or 2.4% of their market capitalization, a record, compared to 835 billion in the United States for 2.2% of capitalization.
It should be remembered that the lower the stock market price, the easier it is to buy back shares. Teleperformance had also decided to launch a program of 150 million euros, after its price plunged in November due to a social controversy in Colombia. But European stocks are cheaper than US stocks, with a discount in terms of earnings multiples of 13% over the past 30 years, and more than 20% more recently, according to Bernstein.
Share buybacks, which are generally followed by cancellations of shares, can lead to accretion for shareholders since, all other things being equal, they increase earnings per share.
Like dividends, in pure financial theory, share buybacks do not, however, enrich shareholders since the company is in reality only redistributing cash it already has. Nevertheless, as a 2005 McKinsey study noted, share buybacks are often well received by the market because they send a signal of confidence from companies, in particular because company management may judge that the the company’s share price is depreciated and/or that it has sufficient cash to ensure its functioning and operations.
A trickle down to start-ups
Sometimes there are criticisms – such as, for a time, of BlackRock chief executive Larry Fink – of the use of share buybacks because they can come at the expense of other operations such as investments and mergers and acquisitions. value creators. But the opposite counterpart is that, precisely, the market may prefer these takeovers to risky investments or excessively risky external growth operations.
“The relevance of share buybacks depends on the alternatives. Keeping cash in the bank is useless when you have little debt to repay. And you shouldn’t overinvest either, that’s not what we ask leaders of the CAC 40, who can very well make investments efficiently while retaining significant liquidity”, explains Pascal Quiry.
“Share buybacks can therefore be used, allowing shareholders to find new investment opportunities. It is a capital reallocation tool,” he argues. “For example, start-up financing in 2022 has reached record levels and this financing comes, in part, from dividends and share buybacks set up by CAC 40 groups,” adds the professor.
In his last letter to the shareholders of his company Berkshire Hathaway, the famous investor Warren Buffett had ardently defended share buybacks. For him, well-executed share buybacks benefit “all shareholders at all levels”.
“When you are told that all share buybacks are harmful to shareholders or to the country, or even particularly beneficial to the bosses, you are listening to either an economic illiterate or a slurred demagogue,” continued the billionaire. This seems to represent a snub to the American president, Joe Biden, and his administration, very critical of share buybacks.
Julien Marion – ©2023 BFM Bourse