During his television interview on March 22, Emmanuel Macron gave himself a little moral lesson with regard to multinationals. “There is still a bit of cynicism at work, when we have large companies that make such exceptional income that they end up using this money to buy back their own shares”, pointed out the President of the Republic. Economic advisor to Natixis and professor of economics at PSE (Paris School of Economics), Patrick Artus talks about this financial mechanism that is very popular in the United States, which is starting to flourish in France: TotalEnergies, Stellantis, BNP Paribas or LVMH have announced recently their intention to resort to it, for considerable amounts.
L’Express: What is the rationale for share buybacks?
Patrick Arthur: There is a strong theoretical argument, which must be considered. If a company generates such profits that it is unable to reinvest part of it in projects that are sufficiently profitable for it, it must return this money to its shareholders, who will know how to invest it elsewhere, in other more buoyant sectors. In short, it is unreasonable to force a company to invest if it is not ready to do so, for lack of having identified the right opportunities or having the ad hoc teams on hand. The exceptional profits made in 2022 by certain CAC 40 companies are linked, among other reasons, to unexpected events in their business plan, such as the energy crisis or inflation. On paper, the buyback of shares may therefore appear as a response to an accidental situation: the cash thus released is supposed to irrigate the economy and finance the creation of start-ups or innovative companies, for example.
Is that the case ?
In truth, it doesn’t happen that way… There is no empirical evidence that share buybacks are correlated with additional productive investment. American companies have been using this device for a long time. Without ever seeing a noticeable effect on investment. The natural inclination of the institutional investor is to reinvest in other lines of his portfolio the cash he receives, which drives up prices. But collectively, on a macroeconomic level, it is inefficient. The theory is virtuous, the reality is quite different.
Should the State be responsible for allocating this cash elsewhere, in ecological transition or tech for example, through a tax?
It is an option. I prefer the idea of tax incentives for companies to direct their own surplus profits towards innovation, rather than towards share buybacks. It would be more interesting. The government seems to want to take another route and force groups that buy back their own shares to give more to their employees. But in these large companies, which are doing well, profit-sharing and participation are already at high levels. It would be wiser, in my opinion, to channel this money towards the major challenges of tomorrow.