Market: Why share buybacks in the United States are in decline

(BFM Bourse) – According to S&P data published by the Financial Times, share repurchases of S&P 500 companies totaled $175 billion in the second quarter, their lowest level since the last quarter of 2020. The rise in interest rates rather than the rise in taxation explains this abrupt decline.

The end of “free money” with interest rates at the highest since 2007 (for the yield on the 10-year American bond) also has consequences on the return to shareholders. And more precisely on company share buybacks.

As a reminder, the buyback of shares constitutes an alternative form to the shareholder remuneration dividend. The company acquires its own securities on the market and, if it cancels them, increases, all things being equal, the share of its profit which goes to its shareholders. Since this amounts to taking the same cake that we divide into a smaller number of parts. Furthermore, if the market capitalization of the company remains the same and there are fewer shares in circulation, this should automatically increase the unit price of each share (depending on market conditions).

Apple thus bought back last year, according to Janus Henderson, the impressive amount of 89 billion dollars of its own securities.

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A sudden brake

The flexibility of this tool, which can be easily interrupted and is not accompanied by an implicit commitment to recurrence unlike the dividend, has led it to be favored by certain large groups that do not pay coupons to their shareholders, such as Alphabet , Meta or Berkshire Hataway, Warren Buffett’s company.

In financial theory, as with the dividend, these share buybacks do not enrich the shareholder, because the company uses cash that it already had and which it could have devoted to other value-creating operations such as investments or acquisitions. However, as a 2005 McKinsey study noted, share buybacks are often well received by the market because they send a signal of confidence on the part of companies, particularly because company management may judge that the the company’s price is depreciated and/or that it has sufficient cash to ensure its functioning and operations.

But these share buybacks, which have gained enormously in popularity in the United States in recent years (and more recently in Europe), have experienced a severe slowdown.

While in the first quarter, S&P 500 member companies had still repurchased $215.5 billion, up 2.1% compared to the previous quarter according to the S&P Global group, these repurchases have stalled.

According to preliminary S&P data published by the Financial Times Last week, share buybacks by S&P 500 members fell to $175 billion in the second quarter of 2023, down 20% year-over-year and 19% from the previous quarter. According to the infographic posted online by the British business daily, this is the lowest amount since the last three months of 2020, when companies retained cash in the face of the uncertainty caused by the health crisis.

Increase in taxation

This deflation can be linked to the rise in interest rates. Their increase makes access to cash more complicated and encourages companies to keep their cash or even invest it, rather than giving it back to its holder. Remember that the Federal Reserve’s (Fed) key rates are currently at their highest levels since the early 2000s.

“When rates were zero, it made sense for companies to issue long-term, low-rate debt and use it to buy back stock. Today, that’s no longer the case,” says Jill Carey Hall, equity strategist at Bank of America Financial Times. According to her, companies are also facing increased pressure to invest in areas such as the relocation of their supply chain, automation, artificial intelligence and even decarbonization.

Ben Lofthouse, from Janus Henderson, made a similar observation in May. “The overall cost of capital is currently much higher than in recent years. It remains to be seen what impact this situation will have on share buybacks in the months and years to come,” he warned. .

“When companies could obtain financing at almost zero cost, they had a strong incentive to issue debt and repurchase shares because it represented immense value. For companies that generate enormous amounts of cash, like Apple or Alphabet, this factor is not decisive. For others, particularly in the United States, who have resorted to borrowing to finance buyouts, the calculations will now be established with much more finesse.” the expert developed.

Note that a tax on share buybacks in the United States of 1% came into force on January 1, which drained $1.6 billion in additional tax revenue from S&P 500 companies in the second quarter. according to S&P data cited this time by the Wall Street Journal. But according to Howard Silverblatt, an S&P analyst cited by the Financial Timesthis tax had no real impact on share buybacks.

In France, the executive mentioned in March a potential exceptional contribution for companies carrying out share buybacks, notably via an increased payment of participation, profit-sharing or tax-free bonuses. The Minister of Public Accounts, Thomas Cazenave, relaunched this idea this week, saying he was ready to work with all political forces in order to integrate amendments on this subject within the framework of the Finance bill for 2024.

Remember that share buybacks in 2022 reached a record amount of $1,310 billion worldwide, according to Janus Henderson, up 22%. Of this amount, nearly 1000 billion (932.4 billion) were made in the United States, an increase over one year of 23%. In France the amount amounted to 28.87 billion, down 19%.

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