European politicians will likely feel equally furious and helpless as corporate payouts rebound in wartime. Big Oil’s expected $200 billion profits – and associated takeovers announced by Shell Plc, BP Plc and TotalEnergies SE – look like just the tip of the iceberg in a region that has seen profits and payouts soar but where capital expenditure seems fragile. As windfall taxes have been slapped on the energy sector, expect calls for a buyout tax – which in the US could bring in $74 billion over a decade – to grow.
After all, shareholder-friendly splurges are now a transatlantic phenomenon. European companies are now repurchasing more of their market capitalization than their American counterparts: repurchases reached 27.2 billion euros ($30 billion) and 55.2 billion pounds ($68.4 billion) respectively in the leading French and British companies in 2022, according to data from Natixis and AJ Bell. Luxury heavyweight LVMH, defense firm BAE Systems Plc and distiller Diageo Plc are among those joining; Corporations were the biggest buyers of European stocks last year, according to strategists at Goldman Sachs Group Inc.
Buyouts are seen by proponents as a better way to allocate capital when other options, such as mergers or expansion, seem less profitable. In Big Oil’s case, that might make sense in a world where the risk premium on fossil fuel projects has risen. Likewise, in sectors with little ESG support like defense, or in tightly regulated areas like financial services, the pressure to compete with other investments means a need for increased sweeteners for shareholders. And, overall, it works for them – an index that tracks European companies buying back shares outperforms the market as a whole.
But the problems start when the size and pace of these payments dwarfs the growth of more socially useful spending like capital investment, research and development, or wages. While the drive to invest more in supply chains means we are no longer in the capex spending drought of the 2010s, post-pandemic investment has rebounded more slowly than earnings and is expected to stall alongside the economic growth this year. Meanwhile, wartime inflation, which inflated profit margins while squeezing consumers, will remain high – as will the pressure to share a bigger slice of the pie with workers.
The fact that layoffs are on the rise also casts a bad light on shareholder bargains. Big Tech spent money on takeovers last year; now they are cutting jobs. Salesforce Inc. will spend about as much on restructuring costs as it does on share buybacks in Q3 2022. For a practice that is supposed to be efficient capital allocation, buying back overvalued shares seems incredibly wasteful. Halting takeovers by Starbucks Corp. last year also highlighted a business logic behind investing, even in an economic downturn, for example to defend market share.
Even without succumbing to what is ruthlessly called “buyout derangement syndrome,” there are good reasons to use taxation as a means to nudge behavior in a different direction in an era when government budgets and consumer wallets are strained. The 1% rate seen in the United States is little more than a rounding error and is probably just the beginning. But UK think tank IPPR estimates that applying it to FTSE 100 companies would raise £225m in a year. Already, France is set to see a new flat tax on above-average dividends and redemptions – although, in a haphazard fashion, it will come on top of existing levies on stock market transactions.
The irony of the current situation is that the buyout boom could deflate before it generates much tax revenue. Companies could soon be rewarded by shareholders for conserving cash or strengthening their balance sheets in an altogether riskier environment. And dividends, while harder to cobble together than buybacks, may end up looking more attractive as a payment.
But if the takeovers continue to pile up, at a time when social unrest in Europe escalates and governments roll out subsidies for clean tech, expect Biden’s frustrations to reverberate beyond the White House.
More from Bloomberg Opinion:
• Redeem, Baby, Redeem: Elements by Liam Denning
• Biden right to question oil stock buybacks: Matthew Winkler
• Is Big Tech safe from shareholder activists? : Olson and Hughes
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.
More stories like this are available at bloomberg.com/opinion