Verizon as a case study of why the economy doesn’t work, part 3
Once upon a time, dividends were how corporations distributed excess profits to shareholders. But with the 2003 Bush tax cuts, things changed. The tax code began giving preferential treatment to dividends. And then dividends themselves changed. Now they are nothing more or less than “a sum of money paid regularly by a company to its shareholders.”
The connection between profits and dividends got lost. Now dividends can be paid out of cash reserves… or funded by long-term borrowing. Where the money comes from doesn’t seem to matter all that much. The only thing that seems to matter is: that the money goes to the stockholders who expect it.
I stumbled over this ugly truth – again – while looking at stock buybacks, particularly those done by Verizon. Why do corporations do stock buybacks? One of the reasons given is: to reduce the number of shares outstanding, in order to increase the value of the remaining shares. Fewer shares should mean each share is worth more, right? But when I looked closely at Verizon’s latest huge stock buyback, well… the post-buyback price bump disappeared in about a month. (And of course, all the trillions spent on buybacks before September 2008… didn’t keep the stock market from crashing then.)
So then there’s the other reason given, why to do stock buybacks. Reducing the number of shares through a buyback increases the “earnings per share” metric. (Same earnings divided by fewer shares makes the EPS bigger). And, the second part of that reasoning goes, companies that have higher “earnings per share” can afford to give out higher dividends, which keeps stockholders happy.
When I looked at Verizon’s EPS, and compared it to corporate dividends… I didn’t see any correlation whatsoever. Here’s what it looks like, for the past five years.
You’ll notice that Verizon’s $5 billion buyback – announced and then mostly completed this past February – didn’t change their 2015 Q1 dividend (which was declared on March 6) and it didn’t change their 2015 Q2 dividend. Nope. Despite that $5 billion buyback, the quarterly dividend remained exactly the same as it was on September 4, 2014. Even massive losses in 2011 and 2012 didn’t change the dividend. (How does a corporation lose $1.48 per share and still pay a $0.515 dividend? And the CEO still keeps his job? And the stock price doesn’t dive?)
Click on the image to see the same comparison over the past decade.
Here’s what I saw: the earnings per share bounced around, but the dividends stayed roughly the same. Dividends grew – with surprising regularity – but there didn’t seem to be any correlation whatsoever between earnings and dividends. Just a nice steady upward line on dividend payments.
Steady increase in dividends, no matter what. Pretty much ever since the 2003 change in our tax laws.
Even through the Great Recession, dividends kept increasing. Ratcheting upward, ever upward.
But no correlation whatsoever – that I could see – with stock buybacks.
Not even the $5 billion stock buyback Verizon did in February.
Here’s the thing that still irritates me, about that buyback. In February 2014, Verizon’s Chief Financial Officer ruled out any buybacks for at least a couple of years. Instead, Verizon was supposed to be paying back debt—including the $49 billion of debt it had added less than five months before. That was the “biggest company debt offering ever…more than double the previous issuance record of $17 billion (by Apple, Inc.).” A deal that was “about the size of all outstanding obligations of the Slovak Republic.” A deal that was really, really expensive because of its size and the corporation’s low credit rating.
Yes, in those circumstances, it would indeed seem financially prudent to focus on paying back debt. But instead, Verizon raised its dividend again. And did a $5 billion buyback in February 2015. And then came after its employee unions, looking for wage, benefit and job security concessions.
Back when Verizon’s CFO was ruling out buybacks, the corporation had $114 billion of debt.
Now, after that $5 billion buyback, the corporation has $120 billion of debt (as of June 30, 2015).
And – after shoveling all that money out the door to stockholders – the corporation still insists on concessions from its unions.
I did a little math. Verizon has about 177,300 employees (most of them are not represented by a union). If the corporation had spent that $5 billion on its employees – rather than buying back its own stock – Verizon could have given each and every employee $28,200.
And then I did a little more math. Despite the February buyback, Verizon still has more than 4 billion outstanding shares of stock. That means each of the quarterly dividends it has issued this year has cost the corporation more than $2.2 billion. That’s more than $50,000 per employee that Verizon will transfer to stockholders through dividends, this year alone.
And the corporation is demanding givebacks from its employees’ unions.
Money going to the top of the economic pyramid, rather than to working families – that’s why our economy doesn’t work anymore.
If you want to support the 39,000 Verizon employees who have been working without a union contract since August 1st, you can sign the petition here.
Stand Up to Verizon is on Facebook here.
Part one of this “Verizon as a case study” series is here.
Part two of the series, showing how Verizon executives benefited from the $5 billion buyback, is here.
This is part three of the series.
Part four, about phantom stock and how Verizon executives are avoiding taxes by investing in imaginary assets, is here.
Part five, about how Verizon is borrowing money to pay stockholders and executives while demanding givebacks from unions, is here.
Part six calculates that — because of all the dividends and long-term borrowing — each share of Verizon stock now represents less than $3 in stockholder equity (even while it’s trading at more than $40 a share); read it here.
And yes, there will be more in the series. Please check back.
Read more about how US tax policy encourages profit-taking — even profit-taking that bankrupts corporations — in “What Mitt Romney Taught Us about America’s Economy” here.