Big Oil’s Big Buybacks Are Tip of $1 Trillion Iceberg


Chevron Corp.’s blockbuster $75 billion share buyback has drawn the ire of Joe Biden, whose call for more investment in pumping oil — alongside a new 1% tax on buybacks — doesn’t seem to have done much to steer cash into unloved fossil fuels and away from short-term investor sweeteners. Corporate America spent an estimated $1 trillion on buybacks last year.

European politicians will likely feel similarly irate and helpless as corporate payouts rebound in wartime. Big Oil’s expected $200 billion profit haul — and related buybacks announced by Shell Plc, BP Plc and TotalEnergies SE — only looks like the tip of the iceberg in a region that’s seen profits and payouts jump but where capital spending looks shaky. While windfall taxes have been slapped on the energy sector, expect calls for a buyback tax — which in the US could raise $74 billion over a decade — to grow.

After all, shareholder-friendly splurges are now a trans-Atlantic phenomenon. European companies now buy back more of their market capitalization than US peers: Buybacks reached 27.2 billion euros ($30 billion) and 55.2 billion pounds ($68.4 billion) at top French and UK firms respectively in 2022, according to data from Natixis and AJ Bell. Luxury-goods heavyweight LVMH, defense firm BAE Systems Plc and distiller Diageo Plc are among those joining in; corporations were the biggest buyers of European stocks last year, according to Goldman Sachs Group Inc. strategists.

Buybacks are seen by advocates as a better way to allocate capital when the other options, like mergers or expansion, look less profitable. In the case of Big Oil, that might make sense in a world where the risk premium on fossil-fuel projects has gone up. Likewise, in ESG-unfriendly sectors like defense, or tightly regulated areas like financial services, pressure to compete with other investments means a need to ramp up shareholder sweeteners. And, on balance, it works for them— one index tracking European firms buying back shares is outperforming the broader market.

But the problems start when the size and pace of these payouts eclipse the growth of more socially useful spending like capital investment, research and development or wages. While the push to invest more in supply chains means we are no longer in the capex drought of the 2010s, post-pandemic investment has rebounded more slowly than profits and is likely to stall alongside economic growth this year. Meanwhile, wartime inflation, which has fattened profit margins while squeezing consumers, will remain high — as will pressure to share more of the earnings pie with workers.

The fact that layoffs are mounting also throws a bad light on shareholder bonanzas. Big Tech splashed cash on buybacks last year; now they’re cutting jobs. Salesforce Inc. will spend about as much on restructuring charges as it spent on buying back shares in the third quarter of 2022. For a practice that’s supposedly about efficient capital allocation, repurchasing overvalued shares looks incredibly wasteful. Starbucks Corp.’s halt to buybacks last year also pointed to some business rationale behind investing even in an economic slowdown — such as to defend market share.

Even without succumbing to what’s uncharitably called “Buyback Derangement Syndrome,” there are good reasons to use taxation as a way to nudge behavior in a different direction at a time of stretched government budgets and consumer pocketbooks. The 1% rate seen in the US is little more than a rounding error, and is likely just the start. But UK think tank IPPR estimates its application on FTSE 100 firms would raise 225 million pounds in one year. Already, France is set to see a new flat tax on above-average dividends and buybacks — though, messily, it will come on top of existing levies on stock trades.

The irony of the current situation is that the buyback boom may deflate before generating much in the way of tax revenue. Companies may soon be rewarded by shareholders for sitting on cash or strengthening their balance sheets in an altogether riskier environment. And dividends, while harder to tinker with than buybacks, may end up looking more attractive as a payout.

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

More From Bloomberg Opinion:

• Buy Back, Baby, Buy Back: Elements by Liam Denning

• Biden Is Right to Question Oil Stock Buybacks: Matthew Winkler

• Is Big Tech Safe From Activist Shareholders?: Olson and Hughes

This column does not necessarily reflect the opinion of the editorial board or 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 on bloomberg.com/opinion

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