Frydenberg challenges corporate Australia to rein in share buybacks and dividends
Treasurer Josh Frydenberg will challenge corporate Australia to end the proliferation of special dividends and share buybacks as part of a new productivity push aimed at giving a $3000 annual lift in worker wages.
In an intervention that risks irritating corporate heavyweights and investors, the Treasurer will suggest boardrooms that prioritise short-term shareholder returns above long-term investments are hurting national productivity rates and warn changes are needed if Australians are to "continue to make our own luck".
The Morrison government is preparing for an escalating trade war between the United States and China to hit the economy and has turned its attention to lifting productivity growth from 1.1 per cent to 1.5 per cent to help limit the fallout.
Targeting businesses with "healthy balance sheets and record low borrowing costs", Mr Frydenberg will on Monday question whether corporates are being "aggressive enough in the pursuit of growth" given a recent boom in share buybacks and special dividends.
"Share buybacks and capital returns are becoming increasingly prominent and the default option for corporates, but is a buyback always the best option for the future growth of the company and therefore the economy?" Mr Frydenberg will say in a speech to the Business Council of Australia.
"Over the last 12 months, approximately $29 billion has been returned to shareholders in the form of buybacks and special dividends, compared to an average of $12 billion over the previous four years – a 140 per cent increase.
"Understandably, management and boards ... will want to be prudent around capital allocation. But the lesson from companies like [biotech companies] CSL and Cochlear is to take advantage of conditions, invest in research and development and back yourself to grow."
He said a more "positive approach to investment and growth" by the business community would help boost the economy.
Labour productivity has grown over the past five years by an average of 1.1 per cent, well below the long-run average of 1.5 per cent. The top 5 per cent of firms in Australia account for almost all productivity growth.
Treasury analysis has found lifting average annual productivity growth back to 1.5 per cent would boost annual incomes by $3000 within a decade, after adjusting for inflation. Wages growth nationally, which averaged closer to 4 per cent prior to 2008, has now been at or below 2.5 per cent for almost five years.
"To guarantee that our living standards continue to rise and our children have even more opportunities in the future, we must tackle the productivity challenge," Mr Frydenberg said.
The government's challenge to corporate Australia follows a string of substantial buyback offers aimed at boosting share prices by reducing the amount of equity on issue. Companies have also favoured investors through special or increased dividends. Boosting shareholder returns can reduce the amount of capital available for investment.
Qantas will have bought back nearly a third of its shares in the past four years following a fresh $400 million offer last week. while packaging giant Amcor on Wednesday unveiled a $740 million share buyback in Australia and the United States. Amcor will buy back its own shares using the proceeds from its recently sold packaging plants in Europe and America. AGL earlier this month announced plans to buy back up to 5 per cent of its shares over 12 months.
Perth miner Fortescue Metals Group will hand down its full-year results on Monday, which are tipped to feature a bumper dividend on the back of surging iron ore prices.
UBS analyst Pieter Stolz told investors last week that while earnings season had been marked by "soft" earnings performance, large companies have been providing bigger than expected returns.
"The main upside surprise this reporting season has been to dividends. We find that 36 per cent of large cap companies have beat expectations on dividends, while only 8 per cent of large caps have missed," he said.
Mr Frydenberg's speech will include a promise to make productivity an agenda item at the next meeting of state and federal treasurers in October. He will also reveal the government is actively considering which projects from its $100 billion 10-year program can be brought forward to stimulate the economy.
Reserve Bank governor Phil Lowe told a summit at Jackson Hole, Wyoming, on the weekend that central bankers now have a limited ability to cushion the global economy from the fallout from "major political shocks" like Brexit, pro-democracy protests in Hong Kong and the worsening trade dispute between US President Donald Trump and Beijing.
Mr Lowe told his international counterparts that infrastructure investment and structural reform in economies would have much greater impact than cutting interest rates but warned politicians were reluctant to act.
Minutes from the RBA's last meeting note dividends "could" provide more incentive to spend and stimulate the economy.
Former RBA governor Glenn Stevens warned in 2014 that a focus on returning cash to shareholders may have stifled the investment in new production needed to rebalance the economy away from mining.
Bevan Shields is the Federal Editor and Canberra Bureau Chief for The Sydney Morning Herald and The Age.