Analysis | Big Oil's Big Buybacks Are The Tip Of A $1 Trillion Iceberg

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Chevron Corp’s Blockbuster Stock Buyback $75 billion worth has drawn the wrath of Joe Biden, whose calls for more investment in oil pumping — alongside a new 1% tax on buybacks — don’t seem to have done much to divert money into unloved ones Fossils steer fuels away from short-term feeder sweeteners. American companies spent an estimated $1 trillion on buybacks last year.

European politicians are likely to feel similarly angry and helpless as wartime corporate payouts soar again. Big Oil’s expected $200 billion profit – and related buybacks announced by Shell Plc, BP Plc and TotalEnergies SE – looks like just the tip of the iceberg in a region where profits and Payouts have skyrocketed, but capex looks shaky. While windfall taxes have been pounded on the energy sector, calls for a buyback tax — which could raise $74 billion in the US over a decade — are expected to grow.

After all, pro-shareholder speculation is now a transatlantic phenomenon. European companies are now repurchasing more of their market capitalization than US peers: according to data from Natixis and AJ Bell, buybacks reached 27.2 billion euros ($30 billion) and 55.2 billion pounds ($68.4 billion) respectively dollars) in leading French and British companies in 2022. Luxury goods heavyweight LVMH, defense company BAE Systems Plc and distiller Diageo Plc are among the participants; According to strategists at Goldman Sachs Group Inc., corporations were the biggest buyers of European stocks last year.

Buybacks are viewed by proponents as a better way to allocate capital when the other options, such as mergers or expansion, appear less viable. In Big Oil’s case, that might make sense in a world where the risk premium for fossil-fuel projects has risen. Likewise, the pressure to compete with other investments in ESG-unfriendly sectors like defense or tightly regulated areas like financial services means the need to increase shareholder candy. And overall, it works for them — an index that tracks European companies buying back shares outperforms the broader market.

But problems begin when the size and pace of these disbursements dwarf the growth of more socially useful expenditures such as capital investment, research and development, or wages. While the push to invest more in supply chains means we are no longer in the investment drought of the 2010s, post-pandemic investment has recovered more slowly than earnings and is likely to falter this year along with economic growth. Meanwhile, wartime inflation, which has boosted profit margins while also squeezing consumers, will remain high — as will pressures to share a larger share of the income pie with workers.

The fact that layoffs are on the rise also reflects poorly on shareholder bonanzas. Big Tech spent money on buybacks last year; now they are cutting jobs. Salesforce Inc. will spend about as much on restructuring expenses as it does on stock repurchases in the third quarter of 2022. For a practice that’s ostensibly about efficient capital allocation, buying back overvalued stocks looks incredibly wasteful. Starbucks Corp buybacks halted over the past year also suggested some business reasons for investing even in a slowdown — such as to defend market share.

Even without succumbing to what has been unkindly dubbed “buyback derangement syndrome,” there is good reason to use taxation as a vehicle to steer behavior in a different direction at a time of tight government budgets and consumer pockets. The 1% rate in the US is little more than a rounding error and is probably just the beginning. But UK think tank IPPR estimates its application to FTSE 100 firms would raise £225m in a year. France will already see a new flat tax on above-average dividends and buybacks — although chaotically it will be added to existing levies on stock deals.

The irony of the current situation is that the buyback boom could die down before generating much tax revenue. Companies could soon be rewarded by shareholders for sitting on cash or strengthening their balance sheets in an overall riskier environment. And dividends, while harder to craft than buybacks, might look more attractive as a payout.

But if the buybacks continue to pile up, at a time when social unrest is mounting in Europe and governments are rolling out subsidies for clean tech, expect Biden’s frustration to reverberate beyond the White House.