While the S&P 500 companies spent a record amount last year on capital expenditures before declaring profits, they invested far less of those profits back into their business than in prior decades. In the 1980's such companies had 70 percent of their profits available for reinvestment, with the rest spent on dividends. Last year, these companies spent all but 2 percent of their profits on dividends and stock buybacks, most of the time enriching corporate management and wealthy stockholders. Relatively, that left very little for investments in productive capabilities, R&D, new job creation, or higher incomes for employees.
Company executive compensation is most always affected by share buybacks. Buybacks can push up share prices, making management’s stock options and prior timed purchases more valuable. It is important to note that planned stock buybacks are not required to be published until management and well placed large stockholders have had the opportunity to load up. Insider trading laws do not apply to stock buyback schemes.
Laurence Fink, chief executive of BlackRock Inc., the world’s largest money manager, in a March 31 letter to S&P 500 CEOs. “More and more corporate leaders have responded with actions that can deliver immediate returns to shareholders, such as buybacks or dividend increases, while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.”
Bhargava (2013) reports that “stock options exercised by top executives increase future share repurchases by US firms. Higher share repurchases, in turn, significantly lowered the research and development expenditures that are important for raising productivity.” In other words, Stock buybacks are a way for management and influential shareholders to loot the companies they run and hold stock in.
From 2004 to 2013, 454 companies in the S&P 500 Index used 51 percent of their profits, or $3.4 trillion, on stock buybacks, on top of a 35 percent of profits on dividends. Of profits not distributed to shareholders, a big chunk was parked overseas, under a tax loophole (more corporate welfare) that encourages U.S. companies not to invest at home.
According to William Lazonick, of the University of Massachusetts Lowell, seven of the top 10 largest share repurchasing corporations spent more on buybacks and dividends than their entire net income between 2003 and 2012. Topping the list were Microsoft at 125 per cent, Cisco 121 per cent, Intel 109 per cent. In the case of Hewlett-Packard, which spent $73 billion, it was almost double its profits. ExxonMobil purchased $287 billion in buybacks and dividends, 83 per cent of net income. Even more ominous: 449 companies in the S&P 500 spent $2.4trillion, more than half their profits on buybacks in those years. They spent almost the same again in dividend payouts. Taken together, that came to 91 per cent of net income that could have gone for other purposes than enriching the wealthiest of stockholders and corporate executives.
Apple keeps tens of billions of dollars offshore to avoid paying US corporate taxes. Yet it borrows at home, including a record $17 billion bond issue in 2014, to fund a massive buyback.
Walmart has trumpeted its billion dollars in recent employees wage increases, but that is a drop in the bucket compared to its stockholder and executive buyback enrichment schemes. Over the past 10 years Wal-Mart has spent more than $65.4 billion on stock buybacks, about 47 percent of its profits. That is an average of more than $6.5 billion a year in stock buybacks, enough to give each of its 1.4 million U.S. workers a $4,670-a-year raise. That is roughly equivalent to the estimated $6.2 billion Wal-Mart costs U.S. taxpayers every year in food stamps, Medicaid, subsidized housing, and other public assistance for Walmart’s portion of public paid corporate welfare.
Nick Hanauer from Making Sense writes:
“Our crisis of income inequality wasn’t principally caused by the rich not paying enough tax, even though we don’t. Rather, it is largely the product of the $1 trillion a year that once went to wages, but now goes to corporate profits. And this demand and investment-killing trillion-dollar-a-year transfer of wealth from the bottom 80 percent of households to the top 1 percent is the direct result of the economic and regulatory policies both Republicans and Democrats have imposed since the dawn of the trickle down era.
As policy shifted economic power from workers to owners over the past 40 years, corporate profits’ take of the U.S. economy has doubled — from an average of 6 percent of GDP during America’s post-war economic heyday to more than 12 percent today. Yet despite this extra $1 trillion a year in corporate profits, job growth remains anemic, wages are flat, and our nation no longer seems able to afford even its most basic needs. A $3.6 trillion backlog has left our roads, bridges, dams and other public infrastructure in disrepair. Federal spending on economically crucial research and development has plummeted 40 percent, from 1.25 percent of GDP in 1977 to only 0.75 percent today.
The core claim of the trickle down economics crowd is that high profits are the principal driver of growth. The higher profits are, the more money we have to “create jobs” and invest. So a fair question to ask is, where did this extra trillion dollars of profit go?
Much of the answer is as simple as it is depressing: Stock buybacks — more than $6.9 trillion worth since 2004, according to data compiled by Mustafa Erdem Sakinç of The Academic-Industry Research Network.
Between 2003 and 2012, the companies that make up the S&P 500 spent an astounding 54 percent of profits on stock buybacks. Last year alone, U.S. corporations spent about $700 billion, roughly 4 percent of GDP, simply propping up their share prices by repurchasing their own stock.
In the past, this money flowed through the broader economy in the form of higher wages or increased investments in plants and equipment or in public investment. But today, trillions of dollars of windfall profits are being sucked out of the real economy and into a paper asset bubble, inflating share prices while producing nothing of tangible value.
Our epidemic of stock buybacks is the smoking gun that reveals just how dangerous bankrupt trickle-down economic theory is: it values profit above all else, and makes the sole responsibility of corporate managers the enrichment of shareholders.
In a recent white paper titled “The World’s Dumbest Idea,” GMO asset allocation manager James Montier points out, that the diversion of cash flow to stock buybacks has inevitably resulted in lower rates of business investment. Public corporations have actually bought back more equity than they’ve issued, representing a net negative equity flow. Shareholders today aren’t providing capital to the corporate sector, they’re extracting it.
Stock buybacks were once considered a form of illegal stock manipulation, until 1982, when President Ronald Reagan’s Securities and Exchange Commission chair John Shad (a former Wall Street CEO) loosened the rules. It was this rule change that made possible the shift toward stock-based compensation that has driven the dramatic rise in the ratio of CEO-to-worker pay, from 20-to-one in 1965 to about 300-to-one today. Before 1982, such massive stock grants would have diluted the number of shares outstanding, causing both EPS and share prices to tumble. But armed with the SEC’s seal of approval, CEOs can now prop up EPS by diverting profits into stock buybacks, making their own previously unimaginable compensation packages possible, while wages as a share of GDP have fallen in almost exact proportion to profit’s rise.”
Additional sources:
http://www.kiplinger.com/...
“The effects of ownership and stock liquidity on the timing of repurchase transactions” completed by Amedeo De Cesari,a, * Susanne Espenlaub,b Arif Khurshed b and Michael Simkovic
http://www.pbs.org/...
http://www.nytimes.com/...