Capitalism has spent the last decade putting itself at risk of survival. There may be casualties in the coming year as a result. 

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As the Guardian notes this morning:

British manufacturers have called on the Treasury to urgently provide more support amid a poor economic outlook to help “weather the immediate storm”.

Make UK, the trade body for manufacturers, and the consultancy BDO found that costs were continuing to rise and output opportunities had been stifled.

A survey revealed that two-thirds of companies (67.8%) said rising energy costs were causing catastrophic or major disruption. Meanwhile, 71.9% said increased raw material costs posed a similar threat, and 66.8% had been plagued by rising transport costs.

I am not surprised by this, because research I have done with colleagues shows that over the last decade or so UK business has systematically undermined its own financial wellbeing by overpaying dividends being that its capacity to weather any shocks has become decidedly limited. That explains the appeal to the government, which they now consider to be the supplier of backstop capital.

Our findings were summarised in this way:

This paper explores the relation between shareholder distributions, corporate investment, productivity growth and other performance metrics in large listed UK firms.

Using a sample based on accounting information from 182 constituent members of the FTSE 350 from 2009 to 2019 the paper provides new insights into the impact of distribution policy on productivity, investment, operating performance and corporate resilience.

Building on previous research (Baker et al 2020, Leaver and Murphy 2021), we explore whether a proportion of large UK firms follow their US counterparts in paying dividends and share buy-backs in excess of their declared income attributable to shareholders earned over a sustained period. In addition, we examine the productivity, investment, operating performance and impairment resilience profile of high distributing firms.

Our key findings are:

  • The top 20% of highest distributing firms paid out 178 per cent of their net income attributable to shareholders between 2009-19. The next quintile distributed 88 per cent of their earnings, on average. These two quintiles represented between them 60 percent of the market value of the sample of 182 companies.
  • In contrast, the lowest quintile distributed just 37 per cent of their earnings, on average, and represented 7 per cent of the sample by market value over the same period.
  • The top 20% of highest distributing firms registered the lowest productivity increases, measured by sales growth per employee and value added per employee between 2009-19.
  • The top 20% of highest distributing firms also had the lowest growth in capex per employee between 2009-19
  • The top 20% of highest distributing firms had the lowest net income margin and net income ROCE performance between 2009-19.
  • The top 20% of highest distributing firms had the highest gearing ratio
  • The top 20% of highest distributing firms had the highest goodwill to shareholder equity ratio, indicating their exposure to impairment ‘shocks’

We then explore the variable performance of the top 20% of highest distributing firms more granularly, noting sectoral variations. We identify the particular vulnerability of large outsourcing firms, who distribute aggressively, have low levels of productivity growth and low levels of investment, generate thin margins yet carry a lot of debt and goodwill.

You cannot have hollowed-out firms driven by the demands of financial neoliberalism and also have businesses capable of surviving downturns caused by reasonably anticipatable issues like inflation. The fact is that capitalism has spent the last decade putting itself at risk of survival. There may be casualties in the coming year as a result.