Energy giant BP has reported record soaring profits on the back of rocketing gas and oil prices, sparking anger as millions of UK households face eye-watering utility bills.
The multinational oil and gas producer announced that its annual profits hit an eight-year high of $12.8 billion (£9.45 billion) in 2021, as wholesale energy prices shot higher. BP has committed to buying back $1.5 billion worth of shares in the first quarter of this year.
But this has prompted questions about why companies buy back their own shares, and whether – with so many people facing hardship – this is an acceptable use of BP’s funding. So why do companies buy their own shares?
READ MORE: How does the energy price cap work? What Ofgem’s price cap means for you as bills soar
What is a share buyback?
A share buyback is when a company uses its own cash to buy shares back from investors.
Businesses which have excess money may use it to pay out dividends to shareholders, invest it in new technology or expanding the business, or use it to buy back shares.
Share buybacks became increasingly common place in the 1980s after US regulators introduced a new rule – Rule 10b-18 – giving corporate executives “safe harbour” from liability for share price manipulation charges when repurchasing their own company’s shares.
However, share buybacks have been criticized for promoting a corporate culture of short-termism and exacerbating boom-and-bust economic cycles.
Why do companies buy back shares?
Companies may buy back their shares for a number of reasons. The most obvious of these is that they want to boost their own share price and raise their overall market valuation.
However, a business that has to take out debt in order to complete a share buyback may risk storing up more credit problems for the future.
Why is BP buying back its shares?
BP says it intends to use surplus cash flow to buy back shares, after reporting a sharp increase in profits – including $4.1 billion in profits during the fourth quarter of 2021.
“We’ve strengthened the balance sheet and grown returns. We’ve made strong progress in our transformation to an integrated energy company,” said BP chief executive Bernard Looney.
However, the company’s large-scale profits have caused considerable anger, as UK households are now facing a huge increase in their energy bills from April.
Energy industry regulator Ofgem last week said it was raising its energy price cap by 54% to £1,971 a year – a hike of £693 – citing the recent rise in wholesale gas prices.
There are fears that the sudden increase in energy bills, which will come into force from April 1st, could plunge millions of people into fuel poverty over the coming months.
While the Labor Party has proposed a one-off windfall tax on gas and energy producers’ profits, the government has refused to implement the measure.
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