What’s Going On Here?Projections out on Monday show British firms are set to spend a record amount on share buybacks this year. What Does This Mean?Everyday Brits might be cutting back their spending, but the country’s biggest businesses sure aren’t. In fact, finance chiefs of companies in the FTSE 100 – an index tracking the UK’s biggest firms – are set to spend a record £51 billion ($57 billion) on share buybacks this year (tweet this), which would reduce the supply of shares and, in turn, mean remaining shareholders would each claim a bigger chunk of any profit. After all, they have plenty of cash to play with: the UK’s biggest companies are multinational firms that make a heap of money overseas, and today’s weaker-than-usual pound means foreign profit is worth more when converted back to home currency. Add lower share prices into the mix, and that might be why high-flying execs believe it’s high time to pay some of that bounty back to shareholders. Why Should I Care?Zooming in: Let’s get cynical. Businesses use their spare cash to reinvest internally, buy other firms, or pay shareholders back. Many executives claim that buybacks – one way to return shareholders’ cash – are a vote of confidence, indicating that shares are going for a bargain. But cynics might argue that buybacks are a last resort, and could be a negative long-term signal that a firm’s management has failed to find any growth-fuelling opportunities.
The bigger picture: How the other half live. British companies gorging on buybacks is a sure sign that they have bucketloads of cash on hand. But you haven’t slipped into an alternate dimension, the country’s economy is still in a tight spot. See, what’s good for business isn’t always good for the country as a whole: while a weaker pound might make companies’ overseas profit look heftier, it diminishes consumers’ spending power on imported goods. Plus, pumped-up commodity prices mean the biggest energy companies rake it in while everyday folk struggle to fill their tanks. |