Date
22 November 2017
The European Central Bank is launching a 1 trillion euro program to boost the economy, but companies are likely to use cheap funding to buy back shares rather than create jobs. Photo: Bloomberg
The European Central Bank is launching a 1 trillion euro program to boost the economy, but companies are likely to use cheap funding to buy back shares rather than create jobs. Photo: Bloomberg

Europe firms under pressure on how to use cheap cash

European companies are likely to step up share buybacks amid an expected flood of cash from the central bank’s 1 trillion euro stimulus program.

But they will be under greater political pressure to use ultra-cheap funding to create jobs and help grow the economy rather that simply buy back their own shares, Reuters reported.

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.

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.

Few people expect European firms to match the staggering sums in the US, where over US$2 trillion of stock was bought back between 2009 and 2014, according to Reuters data.

Nevertheless, about US$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 US$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 program, buybacks are an easy answer, the news agency said.

If the US is any guide, big buybacks will attract criticism. A report by Barclays from September found that, even though capital expenditure remained the top form of US cashflow 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 [quantitative easing], 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.”

Last year French President Francois Hollande told Le Monde newspaper that bosses should use tax credits to reinvest and hire instead of paying out dividends to shareholders.

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