Modern investors hate ‘lazy balance sheets’. ‘Balances have to sweat’, as it is called. Listed companies should not have too much excess cash on their balance sheet that they don’t know what to do with. A war cash for possible takeovers is allowed, as is a pot for investments.
But if there are no expenditures in the pipeline, the surplus funds must be distributed to the owners of the company, in this case the shareholders. The most tax-friendly way is to buy back own shares. Companies are reducing the number of outstanding shares, which means that the dividend payment will have to be distributed among fewer investors in the future. And that means higher prices, which makes every shareholder better.
In the US, it’s rife. Apple recently announced $90 billion – roughly the total tax revenue of a country like Greece – to “give back” its share purchases to shareholders. Cisco, Exxon Mobil and Broadcom also each repurchased more than $10 billion of their own shares.
In recent years, it sometimes got out of hand. Some companies even borrowed money from the bank at zero or negative interest rates, which they then passed on to shareholders through a share buyback program. Or they financed it by selling parts, as Shell did with a gas field.
There has long been a cry that these funds – often also created as a result of clever tax avoidance schemes – should also benefit other stakeholders, say the employees, the customers or the community. And US President Joe Biden has decided to impose a 1 percent tax on share buyback programs to fund his Building Back Better program.
This is the first time in a long time that the country’s shareholder capitalism is being tampered with. It should immediately be copied by Rutte IV who has to repair purchasing power, arrange refugee shelter, build one million houses and tackle nitrogen.
Because Dutch listed funds have also been buying shares in an Anglo-Saxon way for years. Billions are also involved here. ASML has a 9 billion euro share buyback program underway. Shell set aside $7 billion last year to celebrate shareholders through share buybacks. And thanks to record profits in the first half, another 6 billion will be spent on that, while only 3 billion will be spent on renewable energy generation.
AkzoNobel (500 million euros), KPN (300 million euros), RELX (500 million pounds) and NN Group (1 billion euros) also announced that they would buy back shares in 2022. Since 2017, supermarket group Ahold Delhaize has repurchased approximately 6 billion worth of shares. That could also have been spent on discounts for customers, pay for cashiers or a better price for farmers.
It would be nice if Minister Kaag, like the president of the cradle of capitalism, let shareholders sweat for a while. Perhaps a few more percentages could be added to this tax.