European companies are likely to join a boom in share buybacks as central bank cash floods the economy, risking criticism that they are recycling capital rather than investing to promote growth.
European firms are already cheering financial markets by increasingly following their US counterparts in returning cash to investors, propping up their share prices while the euro zone economy remains sluggish. But with the European Central Bank starting a €1 trillion stimulus programme on Monday, political pressure will probably grow on companies to use ultra-cheap funding for creating jobs rather than simply buying back their own shares.
In the United States, years of Federal Reserve stimulus aimed at reviving the real economy led to the wave of share buybacks while firms neglected capital expenditure (capex). Few people expect European firms to match the staggering sums in the United States, where over $2 trillion of stock was bought back between 2009 and 2014, according to Reuters data. Nevertheless, about $8 billion worth of buybacks have already been announced by a dozen European companies this year, including ABInbev and ASML.
That appetite is likely to keep growing: European firms have over $1.5 trillion in cash on their balance sheets and few obvious places to reinvest it to earn a return. Borrowing costs are already at record lows relative to their earnings power, and with the ECB set to depress rates further with its quantitative easing (QE) programme, buybacks are an easy answer. If the United States is any guide, big buybacks will attract criticism.
A report by Barclays from September found that, even though capex remained the top form of US cash-flow spending, the rate of growth of buybacks had far outstripped capex and this meant less cash was being reinvested for growth.
"The debate over corporate spending will increase, especially in Europe, where there is more of an attempt to balance both government and the private sector," said Martin Schulz, portfolio manager at Cleveland, Ohio-based PVC Capital Advisors. "With QE, the average voter thinks they are going to get all this free money ... There's the expectation that corporations are going to reinvest cash. The political pressure will grow."
French companies got a taste of this last year, when president Francois Hollande told Le Monde newspaper that bosses should use tax credits to reinvest and hire instead of paying out dividends to shareholders.
