An common idea now a decade old assimilates now net treasury stock buy-backs to a distribution of funds to shareholders.
Proxinvest says No.
This continues to flourish notably but not only in France where the daily Les Echos headlined on January 18th.2012: ” CAC40 companies paid 44.6 billion euros to shareholders last year” this including 5.7 billion of share repurchases a form of distribution of cash to shareholders ” stated Pr. Yann Le Fur, professor at the HEC business school and respected editor of the Vernimmen reference book in corporate finance. We believe that the addition of this total amount of 2011 capital reductions to the cash dividends paid, leads to a questionable 15% overstatement of the actual distribution to shareholders from these listed companies: a plain intellectual confusion. Actually CAC 40 shareholders including their cash dividend experienced a loss of 13.4% on their shares for 2011; their loss including the dividend received and reinvested over the last five years was of 32% of their investment, and their Total Share Loss over ten years was of 9%.
According to figures of Vernimmen and Les Echos, the capital reductions for of the CAC 40 companies burned 11, 2 billion in 2008 and zero in 2009, 1.9 billion in 2010 and 5.7 billion in 2011. It is quite true that companies have in recent years made an extensive use of treasury stock 92 % of the French listed companies and SBF 250 companies applied for and received the approval by shareholders of a share repurchase program in 2011: these generally cover operations of stock stabilization, or the feeding of shares or stock option plans and finally the possible reduction of capital. We observe that many shareholders tend to resist as the average approval of these resolutions has dropped from 99.3% in 1999 to 93.8% in 2011. Are these opposing shareholders so irrational?
The assimilation of buyback of shares or more precisely, stock cancellation, with a distribution to shareholders is an attractive idea at first but it appears technically dubious and politically dangerous as it encourages the divorce between civil society and the shareholders.
We certainly appreciate the expected benefits from a successful capital reduction program when the listed company has properly done what is needed to communicate and when a lack of attractive opportunities justifies such investment in the company itself.
However, the impact of a capital reduction on the profit of the company is far from being mechanical and its result can only be measured in time. In what appeared to be the lowest stock prices, many prestigious companies have bought their shares in recent years to reduce their capital base but did not the expected increases of their EPS to cover the full cost of the acquisition. Sometimes even they had neglected the marginal cost of the replacement of capital; as considerable fees should be paid to bank guarantee syndicates for a new capital increase. The result is then not a gain for shareholders but rather a clear loss. It is not reasonable to assimilate such legitimate but risky financial fine tuning with a cash dividend to shareholders. Unlike when paying a cash dividend the company buying its share received an asset of equal value in return. While the selling shareholder, the “former shareholder” – has got a cash payment but is also deprived of the asset: a stock repurchase is not a distribution.
Investors can trust management for the conduct of these stock repurchase and cancellation, they also appreciate when companies affirm their confidence in the future by buying their stock or even open in a difficult time a window of liquidity to their shareholders, as did Bouygues in a public offer in 2011 – why not?
But these capital reductions should not be counted as a distribution to shareholders. These know that the compensation for the risk they have taken is only to be to be found in the sum of the cash dividend and the expected increase in the share price. In truth the “Total Shareholder Return.”, have not been brilliant in the last five years, but long term shareholders are patient.
January 18, 2012
