Record year for French firms signing up to share buyback scheme. Why was that?
Heavy-weight French companies with very large profits spent a record €33 billion last year buying back their shares from shareholders.
What is a share buyback and why is it good for the company?
What happens is that, rather than rewarding shareholders by paying them dividends, a company can choose to have similar results through share buybacks. When the company buys back shares, the stock price goes up because of the increased demand in the market, ensuring that the remaining investors’ investments increase in value and stock prices continue to rise.
Usually, the shares that were bought are cancelled, leading to a reduced number of shares in circulation, while the remaining shareholders get a proportionally bigger stake in the company. The step also increases earnings per share (EPS) and, in turn, the market price of the remaining stocks.
The share buyback scheme is very popular with the US’s major companies on Wall Street.
French companies beginning to see the appeal
France’s 40 most important companies (making up the benchmark French stock index CAC 40) earned more than €150 billion in total last year. Subsequently, TotalEnergies spent €9 billion buying back its shares while BNP Paribas allocated €5 billion to improve its financial well-being in the same way.
Several large companies have already announced new share buyback programmes for 2024, including Axa, TotalEnergies and Stellantis.
Taxing share buybacks
Share buybacks are beneficial to the shareholders and the company’s share prices, but are also seen by some critics as controversial.
“Every pound spent inflating share prices is a pound that could have been spent to grow our economy and tackle the climate emergency,” points out the UK’s Liberal Democrats, who are calling for a 4% tax on share buybacks. They say such a tax could “incentivise proper business investment, spur economic growth and raise funds fairly for our public services”.
Across the Channel, the French government is thinking along the same lines.
French state eyes up taking a share of the profits
The French government, facing its own major difficulties in reducing costs and increasing income, is considering creating a retroactive tax on share buybacks. According to French newspaper Le Figaro, it is considering a tax of around 1% tax, which could bring in was much as €300 million to the French coffers.
There are concerns about implementing a retroactive tax, which is widely considered unfair. Theoretically, it would be possible to do, associate lawyer Yoann Chemama from Arsene law firm, told Le Figaro.
The final decision, as well as the possible amount of tax due, will be put forward in the new finance bill in December. If adopted, tax would be due from January 2025.
However, if the tax were to be retroactive, it would mean that share buyback deals declared in 2024 and not currently subject to the potential tax, would also be included. That would be a costly price for the companies to pay.
