The fever to buy back shares has a trick (and the authorities tighten the fence) | Business

In the European markets, the repurchase of shares by companies and then amortizing (destroying) those titles is becoming more and more fashionable. A common practice in the United States for decades and another way of rewarding the shareholder: if there are fewer shares in circulation, the profit per share rises and, in addition, in the future the dividend received will be higher. The typical equation of dividing the cake among fewer diners. From the Mutuactivos manager they put an interesting example in a recent article: in Apple — the company that has invested the most in redeeming shares— while its net profit has grown by 107% in the last five years, its earnings per share have almost doubled, by 196%.

In the first half of the yearhe Ibex 35 companies have redeemed shares worth 7,595 million euros, 130% more than in all of 2021 and a historical record. The large banks (Santander, BBVA, Caixabank), Arcelor Mittal, ACS or Repsol have been the most active in this practice, which they must report to the supervisory body (CNMV).

The controversy over this system has jumped in the US, where the Biden administration manages to apply a tax to these repurchases that Goldman Sachs estimates will move a trillion dollars this 2022 for the values ​​that make up the S&P 500 index. Unlike dividends, where the investor pays his taxes —withholding of 19% in personal income tax in the case of the Spanish market—, the repurchases do not bear any tax because the investor does not receive anything, only the capital in the company of which he is a shareholder decreases. Hypothetically, since there are fewer shares, the value of the company will rise on the stock market and it will pay more taxes because it will obtain a higher capital gain.

A point of view of the latter shared by Javier Garrido, deputy director of the BME Studies Service: “With the redemption of shares, the payment of taxes is not avoided, but is delayed, since the advantages of the operation for the price of the share they will suppose a greater profit for which the investor will pay when he sells”, he explains. For Garrido, the key to share buybacks in Spain is due above all to carrying out financial restructuring after many years of paying dividends through the delivery of shares (dividend). This has led to a very high increase in the number of shares in circulation for many companies. Also the limitations that the Bank of Spain imposed on entities in the payment of dividends can explain this rush of repurchases. “I do not foresee that this year’s volumes in amortizations will be repeated in the future. In Spain and in Europe, in general, shareholder remuneration through dividends weighs heavily, but I think it is interesting to have flexibility to remunerate shareholders”, he concludes.

The other headache for supervisors is to prevent the purchase of shares in the market by companies —whether they are amortized or not— causing their price to be manipulated. In Spain, there is a treasury stock limit of 10% of the capital, although the restrictions came from Europe, through the Market Abuse Regulation that came into force in 2018. Companies cannot have treasury stock for more than three years without make a decision. These purchases must be approved at the shareholders’ meeting and, as long as the shares are held by the company, they lack political (voting) or economic (dividend) rights.

The CNMV is extremely vigilant about these operations: “This operation must be carried out exclusively under the protection of a repurchase or stabilization program contemplated in the Regulation on Market Abuse or a liquidity contract. Any operation with treasury shares that deviates from what is foreseen will be subject to actions that the CNMV may carry out to verify compliance with the prohibition of market manipulation or use of privileged information.

In the US, it is also considered that many of the buybacks seek a rise in the price of the share “so that the executives can collect their stock options (stock options), a way of remunerating the employees of a company and, especially, the directors instead of attending to the strategic interest of the company”, explains Mutuactivos. A practice also known in Spain.

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