When companies are borrowing like never before and yet investment is low, it is reasonable to ask what they are doing with the money.
They could be stockpiling huge sums to guard against a no-deal Brexit. They could be cutting prices to win market share and emerge from the current downturn with a larger customer base. Or they could be paying their workers an inflation-busting pay rise to make up for the freezes and low pay awards that characterised the years following the financial crash.
Some companies can indeed claim that the money has found its way into customers or workers’ pockets. A few have kept sums aside for a rainy day, although manufacturing businesses have spent the cash stockpiling raw materials and parts more than they have bolstered their bank balances.
But the majority of listed companies have followed a different route – acting as cash machines for shareholders and shovelling money into the greedy mouths of the sovereign wealth funds, money managers and desperate pension savers that own so much of the stock market.
The latest figures show that UK companies have been dishing out record levels of dividends, reaching £19.7bn in the first quarter of this year. The information provider Link Asset Services says that’s a rise of more than 15% compared with the same period in 2018.
This increase has come at a time of declining profits that should make most boards think twice about big payouts. The general rule is that companies should generate profits to cover dividend payments by at least one and a half times.
British Gas owner Centrica has one of the worst records for overpaying. In fact, its profits amounted to only 90% of its dividend payment. Hammerson, the property group hit by declining retail rents, just about covered its dividend payout with pre-tax profits, as did energy group SSE, but not by much. And Vodafone still paid a dividend, albeit one reduced by 40%, even though it slumped into a massive £7.6bn loss.
The same trend can be seen in the rest of Europe and in the US. No wonder financial regulators have been asking themselves why companies have borrowed so much in recent years. For instance, the IMF has warned about corporate borrowing and many of the world’s central banks, including the Bank of England, have voiced their concerns.
They wonder why corporates have refused to follow ordinary consumers and rein in their borrowing. Consumer borrowing as a proportion of GDP remains well below pre-crisis levels across the OECD, the 34-member club of rich nations. That’s not the case for corporate borrowing, much of which is done through the bond market rather than directly from commercial banks. Earlier this year the OECD said companies from developed-world economies had seen their outstanding bond debts rise by 70%, from $6tn in 2008 to $10.2tn in 2018.
It said the situation was even worse than these figures would suggest after a significant rise in the numbers of hugely indebted “zombie” companies in almost all developed nations.
The lowest grade bonds now account for 54% of the market, showing that hundreds of thousands of businesses that have borrowed huge sums stand on the precipice of going bust.
Analysts at the OECD reckon a similar shock to 2008 would force traders to downgrade $500m of investment-grade bonds to junk status. The bond market would be in turmoil and governments would immediately be forced to turn to their taxpayers for bailout funds.
These governments, it should be remembered, have also increased their borrowing to levels never seen before, up from $10.9tn in 2010 in the wake of the financial crisis to an expected $11tn this year.
In its warning, the OECD said in the next three years companies were due to refinance $4tn worth of corporate bonds – a sum “close to the total balance sheet of the US Federal Reserve”.
Companies that have over-borrowed and live in fear of their shareholders need one thing: cheap interest rates.
Last week, stock markets in the UK, Europe and the US rose in response to signals from the Bank of England, the European Central Bank and the US Fed that interest rates would stay lower for longer.
Most importantly, the Fed is expected to cut rates this year – effectively reversing its policy, followed since 2015, of tightening monetary policy in the belief that corporations had refashioned themselves to be more resilient.
In veiled language, the Fed will blame Donald Trump’s trade wars, Brexit and slowing Chinese manufacturing output. But the real culprit is that voracious animal with the unlimited appetite – the shareholder.
