Companies in the S&P 500 index spent $3.9 trillion buying back their own shares in the five years to 2022, compared to $2.5 trillion paid in dividends. This is an undeniable source of additional demand for American stocks. And yet, share buybacks are divisive.
On the one hand, they constitute a means for the company to return excess liquidity to shareholders, with a more advantageous tax rate than dividends. But on the other hand, they are likely to be used by companies only to increase earnings per share (EPS) and therefore potentially increase executive compensation if this is indexed to EPS. Conversely, if managers believe their shares are undervalued, this is the best time to buy them back and show confidence in the company.
The fact that US policymakers recently introduced a buyback tax, requiring companies to pay 1% of the value of any buyback, is an indication of the strength of the sentiment towards buybacks. actions. This tax came into force on January 1, 2023.
The British are catching up with the Americans
Despite these criticisms, and if the United States remains in the lead in buybacks, other countries are picking up the pace. British companies almost matched their American counterparts: the proportion of British groups buying back at least 1% of their shares reached a record level in 2022. Japanese, French and German companies also increased their buyback activity. As a result, the advantage of American companies will be reduced in the eyes of investors.
However, are share buybacks adapted to current market conditions? With global interest rates expected to be higher for a long time and growth prospects still weak, businesses have a lot to consider. They will need to consider how to use their excess cash, how cheap their stock price seems, and whether the flexibility of buybacks is more attractive than dividends.
2023-09-18 13:06:23
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