Image by JayMallin.com
Some blog posts are easy to forget. But the one I wrote last week is beginning to give me nightmares.
Here’s why: the stock market keeps hitting record highs. But the so-called “economic recovery” – which started in June 2009 – is just beginning to “trickle down” to us average Americans.
And oh, such a sloooooow trickle! “Although the economic recovery officially began in June 2009, the recovery in household income did not begin to emerge until after August 2011. …Median income in February 2014 [was only] 3.8 percent higher than in August 2011.”
And we’re not anywhere near “recovered” from the damage caused by the last two recessions. “The February 2014 median was [still] 6.2 percent lower than the median of $56,586 in January 2000.”
So in last week’s blog post, I took a look at the research UMass Professor Bill Lazonick and his team have done, about how top US corporations have been distributing their net income to shareholders rather than reinvesting money in their business (or workers).
What Professor Lazonick found: since 2004, the surveyed companies have returned 86% of net income to stockholders through dividends and stock buybacks. In 2013, those companies spent an average of $945 million just buying back their own stock. Repeat: $945 million is the average. That’s per company. In one year.
So I took a closer look at that, using a couple of companies as case studies. I keep hoping that I’m completely wrong. I’m not an economist, I’m not an expert. I’m just a blogger who looks at things from my own personal perspective. And when I looked, here’s what I found:
- CEO Fred Smith owns more than 15 million shares of FedEx (not counting shares held by his wife, his family holding company or his retirement plan.)
- Last October, FedEx announced plans to buy back 32 million shares – more than 10% of its stock.
- FedEx borrowed $2 billion to help pay for that stock repurchasing program. Those bonds run from 10 to 30 years.
- In the past year, FedEx stock has gained over 44 percent. That translates into a huge increase in net worth for Mr. Smith… somewhere between a half-billion dollars (as of my post last week) and $600 million (the stock price kept going up). Yeah… FedEx borrowed $2 billion… and its CEO personally benefited by a half-billion-plus.
- But maybe there’s a reason why FedEx stock soared by 44%? Let’s see… according to the International Business Times, its ground shipping business grew by 13% and it is trimming employee benefit costs by 13%; and so the overall corporate profits grew by 24%.
- Corporate profits grew by 24%… but the stock price grew by 44% (benefiting “company executives who receive stock-based compensation”).
- But of course there are fewer shares of stock now than there were last year, because of the buyback program. So I looked at the company’s “market cap” – or, the total value of all the outstanding shares. And that also grew: from $39.03 billion when the stock buyback was announced last October… to $50.35 billion as of Friday. So the market cap grew by $11.32 billion – or about 29% – during roughly the same time that profits grew by only 24%.
- Let me recap: The company grew its business a bit, while at the same time cutting employee costs. It borrowed to buy back stock, enriching its CEO. And Wall Street rewarded this behavior. Stock value grew – at a much faster rate than the company’s profits were rising.
That difference between 24% growth in profits and 29% growth in market value? Isn’t that just a “Wall Street bonus” for taking part in this borrow-and-buyback scheme? But why is Wall Street is rewarding FedEx for moving toward a “loot the company” model of business behavior?
It’s not just FedEx.
One analysis, from June 2014:
Since the end of 2012, using the DOW (NYSEARCA:DIA) companies as a large cap company market proxy, share buybacks in dollar volume have exceeded the actual level of after tax profits recorded by the 30 companies in the index. What this means is that somewhere in the DOW there must be more than a handful of companies, which are either borrowing money or deferring capital expenditures in a potentially harmful manner for the sole purpose of buying their shares back in the market to boost share price.
From last week’s Wall Street Journal:
Companies are buying their own shares at the briskest clip since the financial crisis, helping fuel a stock rally amid a broad trading slowdown.
Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008.
No, it’s not just FedEx.
Back in February, Cisco announced an $8 billion bond issue “to help finance stock buybacks after the shares lost almost 6 percent over six months.”
- Cisco CEO John Chambers owns about 2 million shares of Cisco stock.
- Cisco stock was trading at $22.12 when that bond issue/buyback was announced. Now, it’s trading at $25.20. Do the math: that’s about a 14% increase in per-share price; and more than a $6 million increase in Mr. Chambers’ net worth.
- Cisco’s market cap was $113.95 billion when the bond issue/buyback was announced. Now, it’s $128.7 billion. Do the math: that’s about a 13% increase in Wall Street’s assessment of the company’s total value.
- But what’s going on with the actual company? Last month, Cisco released an earnings statement “that illustrated its troubles as one of the tech industry’s giants competing in a rapidly changing environment.” Profits are down, compared to last year. And it is planning to eliminate 6,000 jobs.
- Let me recap: Profits are down, layoffs are pending. But the company borrowed $billions to buy back stock, enriching its CEO and other executives. And Wall Street rewarded this behavior.
Want to know what worries me most about Cisco? It looks like Cisco’s CEO is selling his stock. According to the filings, he owns a lot less Cisco stock now than he did when the bond issue/buyback was announced. Doesn’t he have any faith in his corporation’s long-term prospects?
It’s not just Cisco.
American companies have seldom spent more money than they are now buying back shares. The same can’t be said for their executives. … While companies are pouring money into their own stock because they have nothing better to do with it, officers and directors aren’t… Insiders buying stock have dropped 8 percent from a year ago, poised for the fewest in more than a decade.
And even worse? That perspective that companies “have nothing better to do” with their money than buy back stock.
As of a couple of weeks ago:
In total, US companies have announced USD309bn worth of share repurchases year-to-date, up from USD259bn for the same period a year ago, according to Thomson Reuters data.
Do the math. Nine months of stock buybacks equals about 6 million median-wage American jobs.
Let me rephrase that.
The money that US corporations are spending buying back their own stock “because they have nothing better to do with it” could give a $52,000-a-year job to two-thirds of unemployed Americans.
Or: a job paying more than twice minimum wage to all unemployed Americans.
Instead… Cisco’s cutting 6,000 jobs. FedEx is cutting employee benefits. And who knows what all the other companies in Professor Lazonick’s survey are doing?
Here’s the thing: buying back stock doesn’t add any intrinsic value to a company. It’s not a new product line, it’s not a new factory, it’s not any kind of investment in the company’s future. All it does is concentrate the stock ownership. Same everything else – just fewer shares of stock. (Sort of like ultra-concentrated dish soap… same basic thing, just in a smaller bottle.)
So, aren’t these rising market caps at least somewhat artificial? Why should a company be worth more, just because it has fewer shares of stock?
Cisco may have declining profits… but its market cap is growing. FedEx may be growing, but its market cap is growing faster. Why?
Here’s the other thing: To accomplish this concentration of stock ownership… corporations are bonding untold billions of dollars. (Yes, that’s another thing I couldn’t find tracked anywhere.)
So yeah, they’re borrowing against the future… to improve stock prices today.
And Wall Street is encouraging this.
There’s a technical term for those sorts of artificial increases: they’re called “bubbles.”
And that’s why I’m starting to have nightmares.
I’m wondering when this latest Wall Street bubble is going to burst.