Shareholder payouts higher than net profits for one in four FTSE 100 firms

10th July 2020

More than a quarter (28 per cent) of FTSE 100 companies spent more on shareholder distributions than they generated in net income in their last available accounting year, according to new research led by the University of Sheffield.

  • University of Sheffield-led research finds 28 per cent of FTSE 100 companies, 37 per cent of S&P 500 firms and 29 per cent of the S&P Europe 350 paid more in dividends and share buybacks than they generated in net income in their last available accounting year.
  • Coronavirus crisis has revealed weaknesses in well-established firms caused by pre-pandemic “excesses”
  • Experts call for overhaul of accounting rules to “repurpose the corporation”, reduce risks to taxpayers and build resilience to future shocks

More than a quarter (28 per cent) of FTSE 100 companies spent more on shareholder distributions than they generated in net income in their last available accounting year, according to new research led by the University of Sheffield.

In the United States, for 37 per cent of S&P 500 firms shareholder payouts were higher than profits after interest and tax, while the figure for S&P Europe 350 companies was 29 per cent.

On average, S&P 500 firms spent 87 per cent of their net income on dividends and buybacks between 2009 and Sept. 2019, while Euro Stoxx 600 companies paid out 72 per cent of net profits between 2010 and 2018. As of January 2019, US firms paid out 126.8 per cent of their free cash flow, compared with 78.9 per cent for European companies.

The team of experts behind the new report – from the University of Sheffield, Queen Mary, University of London, and Copenhagen Business School – said their findings demonstrated a desire within corporate management to maximise short-term shareholder payouts. They warned that company reserves have been ‘hollowed out’, leaving them more vulnerable to collapse in economic downturns.

Professor Adam Leaver, Professor in Accounting and Society and Director of the Centre for Research into Accounting and Finance in Context (CRAFiC) at Sheffield University Management School, said:

“At first glance the Covid-19 pandemic could be understood as a classical ‘exogenous shock’: an event from outside the economic system that causes disruption and breakdown. But our report shows that management decisions over the last decade have made companies vulnerable.

“Their focus on short-term payouts is going to make the recession even deeper, costs to governments much larger, and will extend the need for central bank intervention.

“A new contract between the workforce, employers, investors and the state is needed, and it must put the social and moral purpose of the firm centre-stage. As we move towards climate-led volatility and disruption, we must think seriously about the agreements that must be forged and the sacrifices that must be made in order to build social and economic resilience to shocks, and enable our firms to work more effectively for a wider, more inclusive range of stakeholders.”

As well as “extraordinarily high” shareholder payouts, the researchers uncovered an increase in companies taking on risky low-grade debt, which could be downgraded to junk – potentially creating refinancing and liquidity problems in the current climate. They also found a build-up of intangible assets on companies’ balance sheets, which are vulnerable to write-downs that could push firms into negative shareholder equity.

One in five S&P 500 companies and 16 per cent of Euro Stoxx 600 firms pay out more than 80 per cent of net profits to shareholders and also hold risky intangible assets worth more than 100 per cent of their retained earnings.

The experts warn that well-established companies now face the procyclical problem of writing down their risky assets just as they realise operating losses. They may also require new capital to keep afloat just as their credit ratings fall and equity markets dry up.

As a matter of “social justice”, the academics call for reforms to prevent the “uneven societal distribution of income and risk”, including:

  • A stronger recognition in company law and accounting rules that management’s core obligation is to protect the capital base of the company so that it may withstand shocks and serve the needs of multiple stakeholders.
  • Repurposing accounting rules so that asset valuations are based on actual transactions rather than subjective estimations of future cashflows.
  • Greater diversity in ownership and governance within national economies.

Professor Andrew Baker, Professor in Political Economy at the University of Sheffield, said:

“Our findings raise fundamental questions about social justice. In a minimally just society, there must be some level of protection for its citizens who, through no fault of their own, bear much of the risk of firm fragility and a declining return on firm proceeds.

“That protection should begin with a repurposing of the corporation to promote the ‘just economy’, improving economic resilience and social wellbeing, where citizens can reasonably expect regulatory authorities to offer protections from these types of vulnerabilities.”

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