(News Bulletin 247) – The total amount of share buybacks increased by 22% in 2022 compared to 2021, while the oil sector quadrupled its expenditure. France, however, is an exception with a decline in these purchases last year.

These are practices sometimes decried by politicians, especially in France where President Emmanuel Macron recently stepped up to castigate them: share buybacks by large listed groups.

This form of return to the shareholder has, it is true, the wind in its sails. Janus Henderson’s study published on Thursday shows it: in 2022, share buybacks reached a record level of 1,310 billion (just under 1,200 billion euros) in dollars, an increase of 22% compared to the previous year.

According to Janus Henderson, who compiled the announcements of 1,200 major global companies, these takeovers are now almost as high as the dividends, now representing 94% of their amounts compared to only 52% in 2012. This percentage rises to 162% in the United States. , due in particular to tech groups. Alphabet and Meta, parent companies of Google and Facebook, which do not pay dividends but regularly buy back their own shares.

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Takeovers very concentrated on a few companies

In value, share buybacks have tripled in ten years, with an increase of 182% when dividends have increased “only” by 54% over the same period.

“The oil sector is by far the one that contributed the most to growth in 2022: oil companies bought back $135 billion of their own shares, an amount more than 4 times higher than in 2021”, underlines the manager of assets.

The United States takes the lion’s share. Share buybacks there amounted to 932.43 billion dollars in 2022 against 758.4 billion dollars in 2021, an increase of 19%. In the UK, redemptions increased nearly threefold to $70.53 billion. France is an exception, with a decline to 28.87 billion against 35.57 billion in 2021.

Share buybacks remain, moreover, very concentrated on a few companies. Apple, the world’s largest market capitalization, bought back $89 billion of its own shares last year, representing nearly 7% of the global total. More broadly, the ten largest buyers account for approximately 25% of the total amount.

A practical tool for companies

“The rapid growth in buyouts over the past three years reflects strong earnings and free cash flow, as well as a desire to reward shareholders without raising unnecessary dividend expectations,” explained Ben Lofthouse of Janus. Henderson, quoted in a press release.

The flexibility offered by this form of return to the shareholder in relation to the dividend may in fact explain why companies are increasingly using it.

In a context of uncertain economic conditions, “companies avoid increasing the dividend too much because they risk having to reduce it for 2023 or 2024”, explained in a recent article Pascal Quiry, co-author of the financial journal Vernimmen and professor at HEC. “They thus have more recourse to share buybacks, because they do not entail any implicit recurrence commitment, unlike the increase in the dividend. It is therefore a flexible tool for returning to shareholders”, he continued.

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.

Could the year 2023 mark a new record? Not necessarily according to Janus Henderson. The asset manager points out that the cost of capital is “much higher than in recent years”. Which is not abnormal, since by construction the cost of capital depends on the cost of debt, which is increasing with the recent rise in interest rates.

“When companies could obtain financing at almost no cost, they had a strong incentive to issue debt and buy back shares, because this 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, which have resorted to borrowing to finance takeovers, the calculations will now be made with much more finesse,” develops Ben Lofthouse.