Companies reporting huge profits should use them wisely
Minting cash in a pandemic is not good PR, says Matthew Lynn. Companies should reinvest it for the future.
This will be a big year for corporate profits. Last week Apple, Microsoft and Google-owner Alphabet reported combined quarterly profits of more than $50bn. Amazon chipped in with another $7bn for the quarter. At Barclays, profits quadrupled and the dividend was up; HSBC this week also reported a strong increase in earnings. And all the main mining companies are minting money as commodity prices recover, as are the oil majors. In the second quarter of this year UK dividends rose by a remarkable 51% and right now they show little sign of slowing down. Investors were expecting companies to make lots of money as they recovered from the pandemic – and they have been proved spectacularly right.
Don’t provoke more anger
Against that backdrop, bumper profits, huge dividends for shareholders and vast executive pay awards are, to put it mildly, provocative. They will inevitably increase the demands for higher taxes and more regulation, and political leaders, even if they want to, are going to find that very hard to resist. After all, for most ordinary people it has been a tough couple of years. Economies have been locked down, careers have suffered, and school leavers and graduates have been struggling to find jobs. Watching the biggest companies in the world make more money than ever inevitably creates a lot of anger – and that is only going to get worse the more they make.
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It’s not as if firms can’t massage their profits down in perfectly legitimate ways. They could invest more and write that off. This may be the perfect year to think about switching to totally green energy, even if it does mean replacing transport fleets, or re-equipping factories and distribution centres. You can take the costs upfront and wait for the benefits to flow through in a few years’ time; or you could sink a lot more money into some promising but speculative research and development. Some of the money will be wasted, but some may pay off spectacularly. Either way, the cost of it will come out of this year’s profits.
A firm could also increase pay, or put more money into staff pension funds. Lots of businesses have been squeezing salaries for years, which is great for short-term profits, but this might be the moment to be more generous. There is a shortage of labour everywhere, so it will help keep your people loyal too. At the same time, pay some extra cash into the pension fund, if there is still one operating. A few years of overpayment might mean you could pay less into the fund later on; or a company could beef up the balance sheet by repaying debt. For years, businesses have been loading themselves up with debt, so this might finally be the moment to take it back down again. Alternatively, if the office or retail network has been sold off in some complex leaseback arrangement to free up cash, why not buy it back again? There are lots of different ways of bringing profits down and a decent finance department could no doubt come up with a dozen more.
Corporate Louis XIVs
In truth, companies reporting huge profits in this climate are courting disaster. They are turning themselves into the corporate equivalent of Louis XIV, the monarch whose extravagance precipitated the French Revolution. It would be better to moderate profits for this year and perhaps next. Stronger balance sheets, more investment and higher salaries won’t exactly hurt.
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