(BFM Stock Exchange) – Companies have tended, in recent years, to multiply the buyouts of their own titles. This form of return to the shareholder mechanically creates an improvement in profit by action. But does she really wear lessons?

It is a form of return to the shareholder which has been on the rise in recent years: acquisition of action.

This practice is simply for a company to buy a certain amount of its securities on the markets. If it then cancels them, mechanically, and all other things elsewhere, the benefit by action increases. This is called reread on the stock market.

This type of distribution is gaining momentum. Again Thursday evening, Alphabet announced that it has authorized a new action buy -back program up to 70 billion dollars, despite current economic uncertainties.

Last year, Goldman Sachs estimated that the share buybacks would reach $ 925 billion in the United States for 2024, after 815 billion in 2023. The American bank also projected that the amount would exceed the $ 1,000 billion mark in 2025 (1.075 billion).

On the CAC 40, however, a slight breathing was observed last year. Residents of the Paris index bought $ 25.5 billion from their own securities in 2024 against 30.1 billion euros in 2023, according to data compiled by the authors of the letter Vernimmen. This still constituted the second “best” year over the period of this study, that is to say from 2003 to 2024.

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Lack of recurrence

Several reasons can lead companies to opt for share buybacks rather than dividends to return cash to their shareholders. In addition to tax reasons, the main reason remains that the acquisitions of action do not involve any implicit recurrence commitment. Increase the dividend and even pay a suggests, in fact, that the company will at least maintain this dividend (or this level of dividend) thereafter.

Recall that the acquisitions of action, such as dividends, do not constitute a “gift” to shareholders. The company is actually only redistributing liquidity that it already has. However, McKinsey noted in 2005 that the share buybacks were often well received by the market because they send a signal of trust on the part of companies. Or underline that the course is too low.

Do these operations really make it possible to lead to an increase in the action courses? It’s not that simple.

“Since the value of the company remains the same but the supply of shares is lower, the price of the action will increase. However, it depends on the behavior of the market,” explains Banco Santander.

Admittedly, the acquisitions of action imply that the benefits of a company are divided by a smaller number of titles. But, “contrary to what we generally think, redemptions do not create value by increasing the benefit by action”, explained in 2001 the review Harvard Business Review. “After all, the company spent liquidity to buy these actions, and investors will adjust their assessments to reflect liquidity and stock reductions, thus canceling any effect on profit by action,” she supplemented. The company has thus changed its financial structure, which normally does not create value, as the economists Frederic Modigliani and Merton Miller theorized.

A “Sophism”

The authors of the Vernimmen letter wrote in July that thinking that the acquisitions of action raise the courses constitutes a “sophism”, that is to say a apparently fair and yet false reasoning. The authors proof of proof the performance of “S&P 500 Buybacks”, an index that retains the 100 companies in the S&P 500 with the highest action buyout ratios in the previous year.

The authors noted that, over ten years, the yield of the S&P 500, a reinvested dividends, exceeded that of the “S&P 500 Buybacks” (9% against 13%). “The objective of share repurchases is not to raise the courses, but more simply to return to the financial markets which financed the company proceeding, equity that has become surplus, at least transitively, compared to its needs,” they then explained.

In January, last, the authors of the Vernimmen letter looked at the 10 CAC 40 companies this time that bought the most titles over the period 2012 to 2024, this reported to their capitalization. For example, ArcelorMittal, Carrefour and Totalenergies acquired over the period respectively 9.4 billion euros, 2.3 billion euros and 31.1 billion euros in share, or, 50%, 23% and 22% of their respective stock markets.

Of these 10 companies, four outperforms the CAC 40 over ten years but six the sub-perform. Again the authors use this example to illustrate the fact that the acquisitions of action do not raise the courses.

A question of companies?

A 2014 S&P study noted, however, that American companies announcing share buybacks had notable outperformances during the sessions according to the announcement. A trend that the authors of the study were not observed, however, for European and Australian companies.

“In reality, the impact of share buybacks on the course of companies depends, I think, above all of the nature of the company. We must make the distinction between growing companies, for whom these share buybacks constitute a real strategy of creating value, and the companies reached at maturity, for whom the acquisitions of action constitute more a supplement of return to the shareholder”, Mirabaud.

“In the cases of the major American tech groups, notably Apple which bought more than $ 800 billion in its own titles since 2012, or alphabet, it seems clear that the share buybacks have formed net support for stock market prices,” he explains.

“In Europe, acquisitions of action is not often carried out by growing companies. They can sometimes be forced to carry them out under the pressure of investors, in particular activist investors. We then arrive at short-term approaches, with potentially the loss of value on the cash,” continues the manager.

“In certain sectors, such as banks and oil majors, there may also be a form of pressure on share buybacks, because these sectors are sought above all for their return rate to the shareholder,” explains Frédéric Rozier

One thing seems certain: the acquisitions of action in no way constitute a panacea. The announcement of concomitant share buybacks to bad results will not carry a business on the stock market, because investors will focus on disappointing accounts. “We must have in mind that the acquisitions of action do not replace the fundamentals of a company,” concludes Frédéric Rozier.