Cui Bono (Who Benefits)?
Verizon as a case study of why the economy doesn’t work, part 2
Who benefits when executives decide to spend corporate funds on stock buybacks?
In my last post: In February, Verizon announced it was buying back $5 billion of its own stock. The repurchase was mostly done within days, but the subsequent “bump” in stock price lasted less than a month. (BTW, Verizon shares are now selling for about 6% less than when the buyback was announced.)
Compared to other companies, Verizon doesn’t usually indulge in stock buybacks all that much.
Its annual reports show that the corporation keeps reauthorizing the repurchase of up to 100 million shares – but most of the time, that authorization just sits on the books and isn’t used. In five out of the past seven years, Verizon didn’t buy back any stock whatsoever. The corporation bought back only about one-tenth of one percent of its stock in 2013. And in 2014, the Chief Financial Officer even “ruled out stock buybacks for at least two or three years as it aims to slash debt.”
And then came 2015.
Yes, less than a year after the CFO “ruled out” stock buybacks, the corporation went ahead and bought back stock anyway – $5 billion dollars worth, and almost all of it purchased within days of the announcement.
Piecing the together the timing…
For ten of its executives, Verizon has a “long-term incentive plan” that includes periodic awards of “restricted stock units” (RSUs). SEC Form 4s show their receipt of RSUs from the 2012-14 incentive cycle. The way the plan works, each RSU can be exchanged for one share of common stock. And according to the Form 4s, most of the executives converted their RSUs into shares of Verizon common stock on February 13, 2015.
And yes, February 13th was pretty close to the peak of the post-buyback “bump” in the stock prices. Verizon shares closed at $47.86 on February 5th, the day the buyback was announced. But on February 13th, the RSUs were converted to Verizon stock at a per-share price of $49.31. That’s a buck-forty-five difference. Per share.
Adding up all the RSUs that were reported on the various Form 4s: Verizon awarded its executives more than 350,000 shares of common stock on February 13th – worth a combined total of $17.36 million.
But those same shares would have been worth only $16.85 million, at the February 5th closing price.
That’s more than a half-million-dollar difference, caused by that buck-forty-five bump in share prices.
Verizon’s incentive program also includes an option to divert the value of RSUs into executives’ deferred compensation accounts.
- Executive VP Daniel Mead diverted the value of almost 3,000 RSUs into his deferred comp account. The share-price difference between February 5th and February 13th meant Mr. Mead’s account was credited with an extra $4,300.
- Executive VP Craig Silliman diverted the value of all his RSUs into his deferred comp plan. The share-price difference meant that Mr. Silliman’s account was credited with an extra $17,600.
Mr. Mead also took advantage of the post-buyback price bump, by selling all the Verizon stock he owned on February 12th – at a price of $49.70 a share. That was almost two bucks above the February 5th closing price. Mr. Mead made almost $46,000 more on that sale than he would have, if he had sold the same stock on February 5th.
Adding up all those little differences… that (relatively small) post-buyback bump in stock prices meant more than $600,000 to the Verizon executives who received RSUs on February 13th.
For Verizon CEO Lowell McAdam, the difference in buyback prices amounted to almost $150,000 of additional value for his RSUs. (It’s good to be the boss: he gets a lot of RSUs.)
Is this why Verizon changed course and bought back stock even after announcing that it wouldn’t?
Verizon could have used that $5 billion for a whole lot of other things. Like, funding a contract for the tens of thousands of its employees who are now working without one.
Buybacks are a problem throughout our economy. Since the “end” of the Great Recession, corporations have spent more than $2.4 trillion on stock buybacks – providing short-term increases in stock prices, but little or nothing else. Really. I looked. I asked around. I did not find any research or academic studies showing that stock buybacks provide long-term benefits to corporations. (If you know of anything, please let me know in the comments section.)
Looking back a decade, I can’t help but notice: except for that little tiny repurchase in 2013, the last time Verizon indulged in buybacks was before and during the Great Recession.
In 2006, Verizon spent $1.7 billion on stock buybacks. At the beginning of 2006, Verizon shares were trading at about $27 per share; by the end of the year, they were trading at about $35. That was a huge bump in stock prices… but it didn’t last.
During 2008, Verizon stock prices tumbled to as low as $22 a share, even while the corporation was spending $1.3 billion on buybacks. Stock prices closed out the year at about $31 a share… but tumbled again in 2009.
What else was going on during that time? Verizon approached its unions about early bargaining – but the corporation insisted on givebacks, so the unions walked away from the table in December 2007. The contract wasn’t settled until August 2008, when Verizon was faced with the prospect of a strike by its 65,000 union workers.
Here’s what hurts:
Verizon spent almost $6 billion on buybacks, leading up to the last recession; yet they started negotiations by demanding givebacks.
At the time, Verizon had 65,000 union workers; and union negotiators’ biggest concern was job security.
Now, that contract covers only about 38,000 union workers – and Verizon is once again spending billions on buybacks at the same time it is demanding worker givebacks.
And I couldn’t find anything – not one thing! – that would show there was any long-term corporate benefit from all those billions spent on buybacks. As far as I can tell, it was all just “money down the drain”… money that could have made a huge difference to the families of Verizon workers.
And looking at the problem economy-wide? Yes, corporations spent trillions on stock buybacks before the last recession. Trillions of dollars that could have made a huge difference to millions of families across America.
But all that money didn’t prevent the 2008 stock market crash.
Still with me? Are you trying to figure out why, if the stock prices bounce around so much, it would matter to Verizon executives whether their shares were worth a buck-forty-five more or less on the day they acquired them?
Here’s why it would matter: it will minimize future taxes. Somewhere down the road, when those executives sell those shares, they will probably have to pay capital gains taxes. “Capital gains” is the difference between the price at acquisition and the price the shares sold for. So: the higher the share price at acquisition, the lower the capital gain, and the less taxes the executive will have to pay.
And yes, right now Verizon stock is selling much, much lower than it was back in February. But those executives don’t have to sell their stock any time soon. They can afford to wait – years, if necessary – until the stock prices rise again.
They’re not trying to figure out how to pay their bills, with no job security. And their employer isn’t demanding givebacks.
H/T to economist William Lazonick, whose research first introduced me to the problems of buybacks. Read his “Profits without Prosperity” here.
Part one of this “Verizon as a case study” series is here. It focuses on Verizon’s $5 billion stock buyback last February, and the short-term bump in stock prices which followed.
This is part two of the series.
Part three, looking at the disconnect between Verizon’s reported profits and the dividends it pays its stockholders, is here.
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.