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Economy & Finance

James Wakefield: Stock buybacks – at what cost?

By Centre Write, Economy & Finance

Stock buybacks are growing in popularity among UK companies, likely a product of the low interest environment and uncertainty over Brexit. While it is not for the Government to instruct companies on how to spend profits, it is their responsibility to encourage investment in capital and R&D so that firms remain competitive. 

Greater sums spent on equity repurchases mean less left over for investment, R&D and wages. Given the dampening effect that Brexit uncertainty has had on investment, the Government should be proactive in urging firms to invest rather than repurchase shares. 

Stock buybacks are regarded by many as a smart method to boost the value of undervalued shares as by repurchasing equity, companies reduce the number of outstanding shares and generally push up their price. Earnings-per-share, an important metric in evaluating executive performance, necessarily increases as there are fewer shares. Perhaps of even greater appeal to executives, buybacks are easy, safe and uncontroversial among shareholders. A resultant rise in the share price will satisfy investors, and if executive bonuses are linked to such increases, all the better.

In the UK, buybacks are on the rise. A Government commissioned report shows buybacks increasing from around £13 billion in 2015 to £22 billion in 2017. Business investment since Brexit has flatlined, reflecting the damage caused by political and economic uncertainty. While the report could not definitively determine causation between these statistics, it is likely that some firms are reacting to Brexit uncertainty by injecting extra cash in buybacks rather than risking investment on new factories, better equipment or R&D. However, the premonitions of a post-Brexit recession will become reality if companies continue to forestall their investment decisions. Moreover, the effects of this hesitancy will extend long into the future if firms become less able to compete globally.

Of note in the report is the finding of a correlation between earnings-per-share incentives in executive remuneration packages and lower levels of investment. Firms that used such targets had levels of investment around a fifth lower compared with those that did not, suggesting that executives may react to earnings-per-share incentives by decreasing investment, possibly to repurchase stock instead. 

At a time of immense uncertainty in the UK, the Government must make every effort to ensure that businesses continue to invest in profitable opportunities. After Brexit, UK firms may have to pay tariffs on exports and therefore it is vital that they invest in methods to lower costs, or risk losing their competitive edge on global markets. Considering the Government’s plans to strike broad trade deals after leaving the EU, a successful Brexit depends critically on UK companies remaining competitive. Equity repurchases will not accomplish this, reflecting at best a ‘wait and see’ strategy and at worst a total lack of imagination from company executives. 

To prevent stock buybacks from crowding out investment, the Government must take action to make spending on capital and R&D a more attractive proposition. From 2019, the Annual Investment Allowance (AIA), which allows firms to claim back corporation tax paid on reinvested profits, was increased to £1 million. This was a positive step, but the AIA is set to revert to £500,000 at the end of 2020. Further increases beyond £1 million must occur to entice behemoths to invest in capital given the major uncertainty in the UK. While indecision is understandable in this context, it leaves Britain ill-prepared for life after Brexit.

To dissuade equity repurchases, the Government must also eliminate the tax arbitrage between the top marginal tax rates charged on dividends (30.6%) and capital gains (28%), which incentivises buybacks. By doing so, buybacks will become, in relative terms, a less efficient form of rewarding shareholders. It should encourage executives to think more deeply on how to utilise surplus cash. 

These measures are important parts of the Government’s wider duty to encourage UK businesses to invest in capital and R&D to ensure they remain competitive after Brexit. To make ‘Global Britain’ a reality, it is fundamental that firms can compete in world markets. The more that investment is withheld, the less likely this will be the case. 

James Wakefield is undertaking work experience at Bright Blue. Views expressed in this article are those of the author, not necessarily those of Bright Blue. 

November 7, 2019

Virginia Crosbie: Through the glass ceiling

By Centre Write, Economy & Finance, Human Rights & Discrimination

Women are becoming the most powerful force in US politics. Three of the most influential US activists – Cecile Richards, Alicia Garza and Ai-jen Poo – have launched ‘Supermajority’, with the goal of rallying two million women over the next year to become political leaders in their communities.

Women are having a voice and using it; the Women’s March the day after the inauguration of Donald Trump was the largest single-day protest in US history. The 2018 mid-term elections saw a record number of women, including women from ethnic minority groups, elected to Congress and the US now has the highest number of women ever running for the 2020 Democratic presidential nomination.

The political phenomenon, Alexandra Ocasio-Cortez, has had a meteoric rise to Congress and is now the second most talked about politician in the US after Trump with her ‘winning hearts and minds’ approach to campaigning.

Women now realise that if they don’t get involved then things won’t change. With a record level of women in office, these are the women who create opportunities for other women to follow. There is still a long way to go; women make up over half the US population, but they are still underrepresented in every aspect of leadership from local politics to the boardroom.

So what does this mean for the UK? We too have seen an increase in participation of women in politics. ‘Processions 2018’ saw tens of thousands of women across the UK march to celebrate 100 years of suffrage. In 2018, the first statue of a women, Dame Millicent Fawcett, the women’s right-to-vote campaigner, was erected in Parliament Square. Later this year, as a result of a crowdfunding initiative, a statue of Lady Nancy Astor, the first female MP to sit in UK Parliament, is to be erected in Plymouth to celebrate 100 years since her election. The campaign to have a woman scientist on the new £50 note has been loud and clear and we will know the result this summer. These are just a few high-profile examples; everywhere, women are raising their voices, getting involved and getting results.

So how do we harness the talents and enthusiasm of women willing to enter the political debate? Groups like 50:50 Parliament are successfully encouraging women from all parties to come forward with its #AskHerToStand campaign. Brandon Lewis MP, the Conservative Party chairman, has announced his ambition of having 50% women candidate lists. The Conservative Party is holding its first Women’s Conference in Birmingham, featuring policy discussions and skills workshops.

Why does this matter? Is this just political correctness? No. It matters because politics often reflects the experiences of those making the policies; unless we have representation on our green benches in Parliament, we are not going to have the policies that reflect the electorate. And without policies that reflect the electorate we are going to find it even harder to win elections.

Women have different perspectives because they have had different life experiences; not better or worse, but different. Women make up 50% of the talent in the UK: let’s make sure we all benefit from it.

Virginia Crosbie is the director of Women2Win. This article first appeared in our Centre Write magazine Identity crisis?. Views expressed in this article are those of the author, not necessarily those of Bright Blue.

October 3, 2019

Sam Robinson: The self-employed savings crisis: more than just money?

By Centre Write, Economy & Finance, Sam Robinson

The rise of self-employment in the UK has been remarkable. Since 2001, self-employed people have gone from accounting for 12% of the labour force to over 15% today, with 1.5 million more self-employed workers. When it comes to saving, however, this trend has brought with it a number of challenges. 

The most obvious issue is that self-employed workers are very much disengaged with traditional pensions; just 31% of the self-employed are paying into a pension, compared to 78% of employees. Strikingly, the median amount of pensions wealth held by the self-employed aged 65 and over is only £36,500, compared to £108,000 for employees. A large proportion of the self-employed do not engage with savings at all. Indeed, roughly a quarter of self-employed people under 35 hold no savings products whatsoever. 

This is not to say that self-employed people are not interested in saving. Two-thirds are concerned about their financial wellbeing in later life. What stops them saving is often the nature of self-employment itself. The top three reasons cited by self-employed people for not saving into a pension are: being unable to afford it; having a low income; and, having too many expenses, bills or debts. Erratic income is another issue: in one survey by the Federation of Small Business, 60% of self-employed reported extended periods of two weeks or more when they were not earning. 

Clearly, part of the problem is practical in nature – self-employed people want to save more, but are prevented from doing so by the challenges of their financial situation. But there is also reason to think that, at a more fundamental level, self-employed people have different attitudes to saving compared to their employed counterparts. 

Self-employed people rely relatively more on property as a source of wealth to build up their savings, and have an altogether more optimistic view of property than employees. Whereas only 40% of employees agree that property makes the most of your money, over half (53%) of self-employed agree. Even more striking is self-employed people’s perception of the safest way to save for retirement: less than 30% of self-employed think that a pension scheme is the safest way to save for retirement, but 43% say property is safest. The picture is starkly reversed for employees: just a quarter deem property the safest way to save, while over half opt for pension schemes. Perhaps unsurprisingly, 65% of self-employed workers hold more in property wealth than in pension wealth, compared to just under half of employees.

But property looks ever less viable as a strategy for retirement as the affordability of housing declines. Since 1997, the ratio of median house prices to median earnings has increased from 3.89 to 7.83. This has been accompanied by a collapse in homeownership: at age 27, those born in the late 1980s had a homeownership rate of 25%, compared with 33% for those born in the early 1980s and 43% for those born in the late 1970s. 

As young people struggle to get onto the housing ladder, property wealth can no longer be relied upon as the source of a good retirement. In fact, on current trends, 52% of pensioners will be paying more than 40% of their income on rent by 2038. As a consequence, over 600,000 of today’s millennials (those born between 1981 and 1996) will be unable to afford their rent in retirement. This is a ticking time-bomb that presents huge challenges for both self-employed individuals and for the state.

Property is not only more difficult to acquire than in the past, but may not be a suitable source of income in retirement. Property wealth can of course be released in a lump-sum if the owner sells it. The first problem with this is that it does not provide a sustained income in retirement. Another problem is that, although many people express a desire to downsize and release equity, in practice a lack of suitable properties and the costs of moving mean that this often doesn’t happen. 

Equity-release products that enable property wealth to be converted into a steady income exist, but such products can be expensive and come with high interest rates. Equity release products are also complex; one survey found that only 11% of over-55s claim to fully understand them. In sum, a key factor in the self-employed’s aversion to pensions is their lack of flexibility, however inflexibility is a charge that can also be laid against property wealth. 

To resolve the savings crisis, part of the solution will be increasing the appeal of pension schemes for cash-strapped self-employed with sporadic income. But it will also involve engaging with fundamental beliefs the self-employed have about saving vehicles, and challenging the widespread notion that property is a safer bet than pensions.

Sam Robinson is a Researcher at Bright Blue. 

September 26, 2019
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