Editorial of the “World”. The truce will have been short-lived. After a rapid slump at the height of the pandemic crisis, large listed companies are starting to buy back their own shares on a massive scale. In the United States, multinationals thus spent in 2021 more than 850 billion dollars (750 billion euros). In France, the amounts remain more modest, but the trend is rising sharply.
The practice had disappeared for a few months in 2020 under pressure from monetary authorities and States. It was indeed difficult to justify to the public opinion to let the multinationals spend enormous sums for the profit of their only shareholders at the same time when the public authorities deployed colossal financial means to avoid the collapse of the world economy. But the resumption of 2021 encouraged the resurgence of these practices.
The process involves a company buying back its own shares on the market and then canceling them immediately. Reducing the number of shares in circulation automatically increases earnings per share, which has the more or less short-term effect of boosting the stock market price, to the great satisfaction of shareholders. Logic has something to challenge public opinion. Billions are going up in smoke to remunerate them while a few months ago the economy was held at arm’s length by central banks and governments. Would not part of this money be better used to prevent the next crisis instead of waiting, once again, for help from the public authorities?
Companies justify resorting to share buybacks because of the lack of investment opportunities that would offer a return above the cost of capital. Having no better way to make their profits, they prefer to return the excess cash to their shareholders. The worst part is that some companies sometimes even go so far as to take on debt to finance these share buyback plans. The objective is therefore no longer only to accumulate productive capital, but above all to raise stock market prices by all means in order to distribute cash to shareholders.
Disproportionate profitability targets
This logic is perverse because it is investment funds that set often disproportionate profitability targets. In many sectors, it is impossible to identify projects that will generate the 12% or 15% return demanded by these shareholders. Companies are then pushed to launch share buyback plans, the effects of which will be safer and more immediate.
Company executives are all the more encouraged to use these practices since they are the first beneficiaries, insofar as their variable compensation is often indexed to the rise in the share price on the stock market. Therefore, to achieve their objectives, they are tempted to increase share buybacks to the detriment of long-term investment projects.
However, we should never forget that the goal of shareholder capitalism is above all to stimulate growth and innovation, and not to share a booty. The resurgence of share buybacks gives the impression of a capitalism at the end of its rope, lacking in ideas and perspectives. Redefining the sharing of added value less favorable to capital, for the benefit of employees, and giving priority to investments for the future should make it possible to overcome this impasse.