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Pfizer Jacks Up Drug Costs, Pays Billions to Stockholders

Prescription Prices Ver5

Photo by Chris Potter via Flickr

Ever wonder why prescription drug costs are so high? Take a few minutes and read Bill Lazonick’s piece on Pfizer.

From January 2001 through September 2015, Pfizer paid out [to stockholders] $95.5 billion in buybacks and $87.1 billion in dividends.

That’s $182.6 billion paid to stockholders… compared to $37.1 billion paid in corporate taxes over the same time frame. Do the math. That’s almost five times more money paid to stockholders than paid in taxes.

Now, stop and think about this. Why are stockholders getting all that money? When shares are bought and sold on the stock exchange, none of that money goes back to the corporation. Instead, the money goes to the previous owner of the stock – who may have owned that stock for less than a second. (Read more about “high frequency trading” here.)

And yet, most corporations pay lots of money to their stockholders. For what? Passing stock from one owner to another isn’t investing in the corporation’s future. So far in 2015, Pfizer has paid more than twice as much to stockholders as it has invested in R&D.

Why are stockholders getting all that money?

— — — —

tieby Unsplash via PixabayPaying money to stockholders benefits corporate executives who are “paid for performance.” (How this works, using Verizon as a case study, is a previous NHLN post.) In the case of Pfizer’s CEO, “75% of his long-term equity awards are earned based on relative and absolute total shareholder return.” In other words, the CEO’s compensation depends on Pfizer paying money to shareholders. If stockholders don’t get enough money, the CEO doesn’t get that compensation. And it’s not just the CEO. All of Pfizer’s top corporate executives are paid according to whether they meet “shareholder return” targets.

Back to Bill Lazonick’s piece:

In 2014, [Ian C.] Read as [Pfizer] CEO had total direct compensation of $22.6 million, of which 27 percent came from exercising stock options and 50 percent from the vesting of stock awards. The other four highest-paid executives named on Pfizer’s 2015 proxy statement averaged $8.0 million, with 24 percent from stock options and 41 percent from stock awards.

Remember, a good chunk of that compensation was based on the amount of money paid to stockholders. Which probably explains why Pfizer is paying so much more to stockholders than it’s spending on R&D.

— — — —

dollar by TBIT via PixabayWhere does all that money come from, anyway?

From Bloomberg:

Pfizer Inc., the nation’s biggest drugmaker, has raised prices on 133 of its brand-name products in the U.S. this year, according to research from UBS, more than three-quarters of which added up to hikes of 10 percent or more. … In a note Friday, analysts at Morgan Stanley said Pfizer’s net prices grew 11 percent a year on average from 2012 to 2014.

The Wall Street Journal documented Pfizer’s three-year market research campaign to decide the price of a new breast cancer drug.

“[I]ts process yielded a price that bore little relation to the drug industry’s oft-cited justification for its prices, the cost of research and development. … Staff members put together a chart estimating the revenue and prescription numbers at various prices… The chart showed a 25% drop in doctors’ willingness to prescribe the new drug if it cost more than $10,000 a month.”

Two years ago, AARP investigated the pricing strategy for another Pfizer drug, with an expiring patent:

[T]he manufacturer of the popular anti-cholesterol drug Lipitor employed an unusually aggressive strategy — including a pay-for-delay agreement, a coupon program, and a substantial price increase — to try to maintain revenue and market share after Lipitor’s patent expired. … Several major U.S. retailers have filed lawsuits against Pfizer and Ranbaxy that accuse them of violating antitrust laws by striking a deal that kept generic versions of Lipitor off the market… Pfizer’s chief executive reported that they maintained three times more market share than what is traditionally seen when blockbusters lose patent protection, “add(ing) hundreds of millions of dollars of profitability to the company.”

And a bunch of Pfizer’s profits come from government spending. There isn’t a lot of available research into government spending on pharmaceuticals, but what I’ve found is enlightening. As of 2010, Pfizer’s Lipitor – in varying strengths – represented three of the top-20 drugs prescribed under both Medicare and Department of Defense health programs. As of 2003, Medicaid was spending almost $650 million a year just on Lipitor.

That’s a lot of taxpayer money going to Pfizer.  While the corporation is paying twice as much to shareholders as it’s spending on R&D. While it’s paying five times as much to shareholders as it’s spending on corporate taxes. While Pfizer is trying to use the US corporate tax rate to justify off-shoring profits through a merger with Allergan.

While Pfizer’s CEO is receiving millions in compensation based on the amount of money the corporation pays to stockholders.

— — — —

hands by Gaertringen via PixabayAnd where else does that money come from?

If you have family or friends on Medicare, you probably know that the price of prescription drug coverage is going up significantly next year – even though there will be no Social Security COLA.

If you’re a State of New Hampshire retiree, you know that your cost of drug coverage is going up significantly next year – even though there hasn’t been a retirement COLA for the past six years.

The billions being paid to Pfizer stockholders are coming out of a lot of pockets… including the pockets of people who are spending their “golden years” choosing between medicine and food.

One more time: why are stockholders getting all that money? What have they done to deserve it?

Buying (and Selling) the Future on Wall Street

Verizon as a case study of why our economy doesn’t work, part six

The “ah-ha!” moment came during a conversation with a friend. What we realized: the way we usually talk about the stock market doesn’t match the reality of our modern economy. Things we assume about stock ownership often aren’t really true.

NYSE_09_26_1963_US_News_World_Report

New York Stock Exchange, 1963 (Photo by US News and World Report via Library of Congress)

Start with the basics: what is a share of stock? Most of us think “Investors give a business money and get back shares of stock that give them a fractional ownership of the company.”

But try applying that concept to Verizon, and it doesn’t fit. Verizon stockholders buy and sell shares on the open market – and none of that money goes back to the corporation. The money that investors pay when they buy stock… goes to the investors who sold the stock.

So buying stock isn’t “an investment in the company”… it’s an investment in the stock itself. If you later sell that stock for more than you paid for it, that profit is what’s known as a “capital gain.” If you sell it for less than you paid for it, that’s a “capital loss.”

Stock ownership does give shareholders a “fractional ownership of the company.” But what does that mean? There are more than 4 billion shares of Verizon stock outstanding.  If you own one of those shares, you don’t have rights to any particular network router or mile of transmission line.  Instead, you own slightly less than one-four-billionth of the corporation’s “stockholder’s equity.”  That means if the corporation were to be liquidated tomorrow, you – along with all the other stockholders – would share whatever remained after the corporation’s assets were sold and its other debts were paid.

And that’s probably when, if you were a stockholder, you would start remembering the $49 billion in long-term debt that Verizon acquired in 2013.

And that’s probably when you’d realize that Verizon’s corporate balance sheet shows less than $12.3 billion in “total stockholder equity.” And there are more than 4 billion shares of stock outstanding.

Which means each share of stock represents less than $3 in stockholder equity.

VZ stock chart

Verizon Share Price

Verizon has been trading above $40 a share since… April Fool’s Day 2012. (Back when there were less than 3 billion shares outstanding and the balance sheet showed stockholder’s equity of about $11.76 per share.)

That’s a huge difference between the per-share value of stockholder equity and the per-share price stockholders have been paying… for years now.

So… what else are stockholders buying? (in addition to that minuscule percentage of a relatively small amount of stockholder equity)

Each share also confers the right to receive a dividend, when and if the corporation issues dividends.  And – no surprise – Verizon has been issuing steadily-increasing dividends for more than a decade.  At this point, it’s issuing dividends that total more than $2.20 a year.  With shares trading between $40 and $45, that means stock purchasers can expect to make back – in dividends – about 5% a year on their investment. Which is way more than the rest of us can get in bank interest right now, if we put money into a savings account.

But although those dividends represent a whopping big “return on investment” – there’s still the risk that you could lose money on the stock itself.  Think about it: if you bought a share of Verizon stock last October, you paid about $49 a share. Since then, you’ve received about $2.20 in dividends. But the price of each share of stock has dropped to about $44. So even though you’ve received 5% in dividends… if you sold the stock now, you would still have “lost” about $2.80 per share.

So corporate executives pay a whole lot of attention to share prices.

VZ_Exec_Comp_Program_from_ProxyFor two reasons. First, because executives’ compensation is largely “pay for performance.” For Verizon executives, 90% of compensation is “incentive-based pay.” And what’s the objective? “Align executives’ and shareholders’ interests.”

Second reason: because most corporate executives own a lot of stock in their company.

VERIZON SHARES OWNED by executivesAs of this past February, when stock incentives were awarded, Verizon’s top 10 executives reported owning a total of more than 645,000 shares of corporate stock – worth, at the time, $49.31 per share… or, more than $31.8 million.

But Verizon stock is now trading at about $44 per share. That means those same executives’ shares are now worth only about $28.4 million.

So is it really a surprise that corporations spend trillions of dollars buying back their own stock, to bump up share prices?  Is it really a surprise that corporations borrow money to pay dividends and fund buybacks?

I don’t see anything here that provides an incentive for corporate executives to grow a company long-term.  Nothing that provides an incentive to pay employees a fair wage.  Nothing that provides any incentive to “create jobs” (no matter how low the tax rate goes).

The only incentives are: to keep stock prices high and to pay dividends. (And an incentive for corporate executives to take as much money as they can, however they can, while it’s still available.)

And so for the rest of us, the economy doesn’t work.

— — — — —

retirement eggWondering why you should find time to care about this, with everything else that’s going on right now?

Because of that huge difference between the per-share value of shareholder’s equity and the actual price per share.

And what happens during recessions.

And the fact that almost everybody’s retirement money is – in one way or another – invested in the stock market.

Here in the Granite State, the NH Retirement System lost 25% of its value in the last recession.

In June 2007, before the Wall Street meltdown, the NHRS had $5.9 billion in investments, including
•  $29.7 million of stock in Citigroup, Inc.
•  $23.5 million of stock in American International Group, Inc. (AIG)
•  $14.0 million of bonds issued by Federal Home Loan Mortgage Corp. (Freddie Mac)
•  $13 million of bonds issued by Federal National Mortgage Association (Fannie Mae)

Two years later, when the recession was in full force,
•  Citigroup stock had plunged to only about 6% of its former value
•  AIG stock was worth only about a penny on the dollar and
•  Freddie Mac and Fannie Mae had both been placed into federal conservatorship

That’s what happens to stock values, during recessions.

Remember hearing about the Detroit bankruptcy? Which supposedly was triggered by unsustainable public employee pension costs? The Detroit pension systems were fully funded, as of June 2008. Then the recession hit.

All those defined-contribution 401(k)s? Across the country, families lost an estimated $2 trillion (with a T) of their retirement savings when stock values plummeted during the last recession.

Artificially-high stock prices hurt almost everybody, in the long run.

— — — — —

Yes, there’s more.

Smashed Piggy Bank RetirementVerizon’s balance sheet includes $24.6 billion of “goodwill” and $81 billion of “intangible assets.” And if you factor those out, Verizon has “net tangible assets” of minus $93.4 billion. That’s what most of us would think of as a negative net worth… of about minus $23.35 per share. While investors are paying about $44 per share to buy the stock.

The good news, from the investors’ perspective: they’re not personally liable for that $116 billion in long-term corporate debt. If – and this is purely hypothetical – if Verizon were to declare bankruptcy and default on that debt, stockholders would not be expected to pitch in $23.35 per share to satisfy the corporations’ creditors.

The bad news is, somebody out there would take that loss… and retirement systems across America invest in corporate bonds. (At last report, the NH Retirement System owned more than $433 million worth of corporate bonds.  Can’t tell, from here, whether any of those include Verizon.)

— — — — —

Photo by Stand Up to Verizon via Flickr

Photo by Stand Up to Verizon via Flickr

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.  It focuses on Verizon’s $5 billion stock buyback last February, and the short-term bump in stock prices which followed.

Part two of the series, showing how Verizon executives benefited from that $5 billion buyback, is here.

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.

This is part six.  And yes, there will be more.

Verizon Borrows Money To Pay Stockholders And Executives While Demanding Givebacks From Unions

Verizon as a case study of what’s wrong with our economy, part 5

Photo by Stand Up to Verizon via Flickr

Photo by Stand Up to Verizon via Flickr

It’s a math problem, instantly recognizable by anybody who’s tried to balance a family budget lately.

But it’s also a morality problem.

Here’s the thing:

  1. Verizon reports annual income of $54,287 per employee. BUT
  2. This past February, Verizon indulged in a stock buyback equal to about $28,000 per employee. AND
  3. Verizon continues to pay out, in annual dividends to stockholders, more than $50,000 per employee.

Between buybacks and dividends, there’s a lot more money being “distributed to stockholders” than the company reports as income. That’s the math problem.

Which is depressingly reminiscent of the business practices of the private equity industry, documented back in 2012. “Bain, and some other private equity companies …had companies paying dividends using borrowed money, not profits.” (Read “What Mitt Romney Taught Us about America’s Economy” here.)

And Verizon has accumulated a substantial amount of debt, along the way. Right now, the corporation has long-term debt equal to about $655,000 per employee. And its Morningstar credit rating is only BBB (“moderate default risk”).

But the dividends it pays out to shareholders keep ratcheting higher… always higher. (And yes, Verizon CEO Lowell McAdam is a substantial shareholder, getting dividends worth more than a half-million dollars a year.)

Instead of cutting dividends to grow the business, Verizon has borrowed money – putting itself in debt at least through 2055.

Just this month, the corporation announced another increase in the dividend rate. While the corporation’s employees were working without a contract. Because Verizon wants givebacks from its employee unions.

Again: Verizon is increasing the amount of money paid to shareholders at the very same time it is insisting on employee givebacks.

Yes, there’s a morality problem here.

———-

Anybody else see the Brookings study, earlier this week, “Would a significant increase in the top income tax rate substantially alter income inequality?”

As I see it, the researchers totally missed the point.

When you’re talking about the macroeconomic effects of tax rates, the big effect has nothing to do with the amount of revenue produced.

Instead, policymakers (and researchers) need to focus on how various tax rates influence decisions made on the micro level.

Anyone who lived through the Eisenhower era of 90% tax rates knows that CEOs make very different decisions when 90% of their income is going to the federal government. (For instance, they’re not anywhere near as likely to borrow money to pay themselves a stock dividend, if 90% of that dividend is going to the federal government.)

———-

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.  It focuses on Verizon’s $5 billion stock buyback last February, and the short-term bump in stock prices which  followed.

Part two of the series, showing how Verizon executives benefited from the $5 billion buyback, is here.

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.

This is part five.

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.

How Do CEOs Make Millions When The Company Goes Belly Up? Investing In Imaginary Assets

Verizon as a case study of what’s wrong with our economy, part 4

Enron play London

Photo by Tilemahos Efthimiadis via Wikimedia Commons


Remember Enron?

Remember when George Bush selected Enron executive Thomas White to be Secretary of the Army? Remember how, when he left Enron, White received a $13 million payment for “phantom stock”?

That was early in the biggest corporate meltdown in history (at the time).  And when analysts tried to reconstruct what went wrong, Enron’s “phantom stock” program was part of the explanation.  “According to documents provided by Enron to the IRS, in 2000, approximately 1,673 employees participated in the program.” “Enron’s SEC filings reveal that some payouts under the phantom stock plan were huge.”

Wondering what “phantom stock” is?

Well… it actually isn’t. Because it’s imaginary. It doesn’t exist.  In the terminology of Verizon’s “Executive Deferral Plan”… it’s just “hypothetical.”

Ah yes… as I was researching this series, I stumbled over traces of Verizon’s phantom stock.

For instance, according to SEC filings, Verizon Director Richard L. Carrion “owns” more than 98,500 shares of Verizon’s phantom stock. “Each share of phantom stock is the economic equivalent of one share of common stock and is settled in cash. The shares of phantom stock become payable following the reporting person’s termination of service as a director.” As of last week, Carrion’s phantom shares were “worth” more than $4.3 million. Which, under a 2004 tax law, apparently isn’t subject to taxation until the money is actually paid to Carrion. After “termination of [his] service as a director.”

And apparently, until the money’s paid out, Verizon’s phantom shares remain so hypothetical that not only are they not taxed

…but I couldn’t find any accounting for them, as a long-term corporate liability, in either Verizon’s 2014 Annual Report or its 2015 proxy statement.

Hopefully, I just missed it. Hopefully, the shareholders have some way of knowing exactly how much “economic equivalent” is out there as a standing liability for future payment.  Because when I added up all of the directors’ phantom stock I could find in the SEC filings, it totaled more than 400,000 shares — which would be worth more than $18 million at last week’s stock prices.

And Verizon doles out lots of phantom stock – not just to directors, but also to Verizon employees.

For instance, Verizon CEO Lowell McAdam. According to SEC filings, McAdam “owns” more than 278,900 phantom shares of Verizon stock. What’s that worth? I have no idea.  According to the filings, the phantom stock McAdam “owns” is the economic equivalent of only “a portion” of the corresponding shares of Verizon stock. How big a “portion”? I have no idea. I couldn’t find that anywhere, either.

VZ phantom stock - employee officersBased on what I could find, 10 Verizon employees who report their ownership to the SEC together “own” more than 1.5 million phantom shares. All reported as “deferred compensation” – payable in the future – but I couldn’t find any record of how much Verizon’s total long-term liability is, for all these “hypothetical” shares.

I couldn’t even find out how many people “own” phantom stock through Verizon’s “Executive Deferral Plan.” Although “a company’s officers and directors” are required to file ownership disclosures with the SEC, other top- and mid-level executives aren’t required to do so. (And remember, Enron reportedly had about 1,673 executives in its phantom stock program.)

And it gets worse.

That Executive Deferral Plan (EDP) also offers “a ‘Moody’s’ investment fund that provides a return that mirrors the yield on certain long-term, high-grade corporate bonds.” (page 8)   But again, this isn’t an actual investment in an actual investment fund.  No, remember, this Plan “is not funded and has no trust or assets to secure your benefits.” (page 17) Because, Verizon tells its executives, “If the EDP were funded by a trust, you would be subject to immediate income tax on your vested Plan benefits.” (also page 17)

Instead, this Plan seems to be just a bookkeeping mechanism. The Plan summary explicitly says: “the investments referred to in the Plan are hypothetical in nature… the Plan administrator will track the performance of the investments that correspond to the hypothetical investments in your EDP account, and the value [of] your EDP account will be adjusted to reflect the gains (and losses) of the investments corresponding to the hypothetical investments in your account.” (also page 17)

But I couldn’t find out how much money – total – is hypothetically “invested” in this hypothetical “Moody’s” fund. I couldn’t find out how many executives participate. So what’s the long-term liability to Verizon’s bottom line?

And it gets worse. There are apparently still other hypothetical investment options. From the Plan Summary: “[Y]ou can elect to have your EDP account treated as if it were invested in any of the hypothetical investment options that mirror the performance of the investment options that are available under the Verizon Savings Plan for Management Employees or the Verizon Business Savings Plan for Management Employees, whichever applies to you.”

But the bottom line liability? How much is owed to Verizon executives under this Plan? I couldn’t find it. Anywhere.  (If you can find it, please leave me a note in the comments!)

Remember that one Enron executive, Thomas White, received $13 million for his phantom stock… and there were 1,670 other enrollees in that company’s program.

Now… I’m not trying to draw an analogy between Enron and Verizon. But the “phantom stock” thing really caught my attention.

And it makes me uncomfortable that Verizon – which has about 178,000 working families depending on it for paychecks – is run by executives who are willing to put millions of dollars of their own money into “hypothetical” investments…

…just to delay taxation on I can’t tell how much executive compensation…

…at the same time Verizon is insisting on concessions from its employee unions.

And it’s not just Verizon. It’s corporations throughout our economy.

Big bucks to executives (who are using all kinds of imaginative ways to avoid taxation)… while working families are expected to give money back, to improve the corporate bottom line.

It’s why our economy isn’t working, for anybody but the folks at the very, very top.

—————

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.  It focuses on Verizon’s $5 billion stock buyback last February, and the short-term bump in stock prices which  followed.

Part two of the series, showing how Verizon executives benefited from the $5 billion buyback, is here.

Part three of the series, looking at the disconnect between Verizon’s reported profits and the dividends it pays its stockholders, is here.

This part four.

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.

 

“Dividend” is Just Another Word for Payout

Verizon as a case study of why the economy doesn’t work, part 3

2015-07-25_Mass_Rally_Stand_Up_To_Verizon

Photo by Stand Up To Verizon via Flickr

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.

Except.

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.

Verizon eps vs dividends 5 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.

Again, this isn’t just Verizon. I’ve seen the same pattern of steadily growing dividends in lots of other large corporations. Walmart. Boeing. FedEx. McDonald’s.

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.

Verizon Proves Exactly What Is Wrong With Our Economy

Cui Bono (Who Benefits)?
Verizon as a case study of why the economy doesn’t work, part 2

 

Telephone Lineman repairing hurricane damage - FEMA photograph_by_Marvin_NaumanWho 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.

  1. 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.
  2. 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.

In 2007, Verizon spent $2.8 billion on buybacks. That year, the share price went from about $35 to about $40 at the end of the year. A decent bump, but…

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.

Billion$ (Trillion$) Down the Drain: Verizon as a case study of what’s wrong with the economy

photo by National Institute for Occupational Safety and Health (NIOSH) via Wikimedia CommonsThese days, most corporations indulge in stock buybacks. A buyback – or, “share repurchase” – is exactly what it sounds like.  Executives decide to use corporate money to buy back shares of stock, rather than investing that money in expanding the business, or using the money to pay back debt, or spending the money on employees.

So far this year, Verizon has spent more than $5 billion (with a “B”) buying back shares of its own stock. But what has that money actually bought?

The theory is that stock buybacks raise share prices. The theory is that if there are fewer shares, investors will be willing to pay more for them.

But as Verizon’s stock history shows, that only works in the short term. The artificial stock-price-boost doesn’t seem to last very long.

For instance, the $5 billion buyback Verizon announced this past February. This particular buyback was both announced and mostly completed within days. Verizon’s per-share price increased from $47.86 on February 5th (the day the buyback was announced) to $49.81 on February 11th. But the next day, share prices started falling again. By March 10th, the per-share price was even lower than it had been before the buyback.

And after the past few weeks’ stock market decline, Verizon stock is now trading at about 5% less than it was on March 10th.

So, what did that $5 billion buy?

The sad truth: as far as I can tell, it didn’t buy Verizon much of anything in the long run.  Investors who sold their Verizon stock on February 11th probably made some money.  Otherwise, at least from my perspective, it was all just “money down the drain.”

The real tragedy is: that money could have been used for so many other things. It could have been used to

…expand their business. Verizon even turned down $568 million in federal funding that would have subsidized the expansion of their broadband network.

…maintain their corporate assets. Millions of customers rely on Verizon’s copper landlines, and pay hundreds of dollars each year for service – yet Verizon spends remarkably little to maintain the network.

…fund fair contracts with its labor unions. Yes, Verizon is engaged in yet another contract standoff with its unions, because the corporation wants to cut shift and overtime differentials, job security and employee benefits. And executives have been preparing for this fight for more than a year now: according to a corporate press release, “Verizon took extensive measures to ensure its customers would not be impacted by any potential work stoppage. Thousands of non-union Verizon employees and business partners have undergone extensive training in various network and customer service functions.”

…change corporate practices that have resulted in more than $100 million in penalties from the Federal Communications Commission. $90 million for illegal billing. $7.4 million for consumer privacy. $5 million for rural call completion problems. $3.4 million for 911 outages. (And that’s just within the past year.)

It’s all about choices.

And Verizon executives have chosen to spend more than $5 billion buying back corporate stock.

Providing – as far as I can tell – no long-term benefit whatsoever to the corporation. (Although, yes, investors who sell their shares immediately following a stock buyback do benefit.)

Here’s the thing that bothers me, even more:

Since the 2009 “end” of the Great Recession, corporations have spent more than $2.4 trillion on stock buybacks.

Water going down a drainYes, that’s $2.4 trillion, with a “T.”

…Money that did not go toward job creation.
…Money that did not go toward business expansion.
…Money that did not go toward paying down corporate debt.
…Money that did not go toward improving wages, benefits or working conditions for employees.
…Money that – as far as I can tell – provided no long-term benefits whatsoever to the corporations that spent it.

Money that – as far as I can tell – just went “down the drain.”

Like that $5 billion for Verizon buybacks, back in February.

————

H/T to economist William Lazonick.  Read his “Profits without Prosperity” here.

Tens of thousands of Verizon employees have been working without a contract for more than a month. Read more here.

This post is just the first in a series.  Part two, showing how Verizon executives benefited from the $5 billion buyback, is here.

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 that 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 there will be more.  Please check back.

What would YOU do with $707 billion?

WWYD_707_billionGoldman Sachs just weighed in with their predictions for next year’s economy. They expect “only a modest growth in business investment”… but a whopping increase in the amount of money corporations will spend buying back their own stock.

(Corporations buy back their own stock to increase per-share prices.  Many CEOs get paid more, if the price of their company’s stock rises.  And most CEOs receive at least some of their compensation as stock or stock options.  Either way, increasing the stock price increases how much $$$ the CEO takes home.)

Next year, Goldman Sachs analysts expect corporations to spend a total of $707 billion buying back their own stock.

What else could Corporate America do with that money?

  • Companies could create about nine million $50,000 jobs – with benefits!  (Wait… isn’t “nine million” the number of people who are unemployed in America, right now?)
  • Companies could “afford” to increase the wages of the 3.3 million minimum-wage workers in America. (Most minimum wage employees work 34 hours or less at their primary job… calculating that as 5.8 billion minimum-wage work-hours a year… would mean that all those workers could get a $122/hour increase!  Yeah, that was “one hundred twenty-two dollars an hour”… do the math yourself.)
  • It could pay for the Food Stamp program — for almost an entire decade. (Which only seems fair, since nearly three-quarters of families receiving public assistance are working families who don’t get paid enough to make ends meet. And it doesn’t matter how profitable the industry is: almost one-third of all bank tellers are on public assistance; more than half of all fast-food workers; thousands upon thousands of workers in other industries.)

But apparently Corporate America isn’t going to be doing anything like that, with that $707 billion. Not creating jobs. Not increasing wages. Not giving up the taxpayer subsidies for their low-wage jobs.

No, Goldman Sachs expects Corporate America to spend that money just… buying back shares of stock.

Which doesn’t really create value. It’s not a new factory, or a new product, or even a new market. All stock buybacks do is concentrate corporate ownership. Like ultra-concentrated dish soap: it’s the same stuff, just in a smaller bottle.

And yes, this does have advantages if you’re looking at things from the CEO’s perspective.

All too often stock buybacks are deceptive things, which create a sugar high in the share price, a nice little windfall for management, and pretty much nothing in the way of actual value creation.

But looking at that $707 billion from the perspective of the 99%…?

  • In a stack of $100 bills… that same money would be about 480 miles high.
  • You could buy enough ultra-concentrated dish soap to fill about 75,000 Olympic-sized swimming pools.

… and from the perspective of the 99%, either of those options would probably be just as good as spending all that $$$ on stock buybacks.

Have a better idea about how to spend $707 billion? Use our comments section to share it.

Read “Nightmare on Wall Street? Are Stock Buybacks Creating Another ‘Financial Bubble?’” here.

Read “Why the Economy Doesn’t Work for the 99%: Massive Payouts to Corporate Stockholders” here.

 

Taxpayers Are Paying Profitable Corporations To Create Jobs?

Toyota GT86 – Frontansicht, 17. September 2012, DüsseldorfWhen word first spread that Toyota was moving jobs from California to Texas, some right-wing talking heads were blaming California’s government.

But within a day, the Wall Street Journal had figured it out: it was actually Texas’ government.  Yes, the newspaper owned by Rupert Murdoch broke the story: Texas to Pay $10,000 for Each Toyota Job

Texas offered Toyota $40 million to move, part of a Texas Enterprise Fund incentive program run out of the governor’s office. At $10,000 a job, it was one of the largest incentives handed out in the decade-old program and cost more per job created than any other large award. Last year, Texas spent about $6,800 to lure each of 1,700 Chevron Corp. positions to Houston and $5,800 for each of 3,600 Apple Inc. jobs shifted to Austin.

Ok, so… let me see if I can get this straight.

Toyota just had a second year of record profits.

Toyota wasn’t actively considering locating in Texas.  “Toyota narrowed its preferred locations to Denver, Atlanta and Charlotte, N.C.” before choosing to move to Texas because of the economic incentives.

$10,000 a job.  Courtesy of Texas taxpayers.

Gosh, it’s a good time to be a corporation.

OK, I need to give the Wall Street Journal some credit here: they have been working the “state economic incentives for jobs” beat for a while now.  From their 2013 story about Washington state’s genuflection to Boeing:

Officials from most of the states Boeing invited to participate have publicly expressed interest. Missouri’s governor, Democrat Jay Nixon, on Tuesday is to sign a package of incentives approved last week by the state’s largely Republican legislature. The measure would be worth $150 million annually to Boeing if the company creates at least 2,000 jobs in Missouri.

Ok, by my math: $150 million a year divided by 2,000 jobs equals $75,000 per job per year… which would have been courtesy of Missouri taxpayers.

Back to their story:

Washington’s legislature last month approved sweeteners valued at $8.7 billion over 16 years—which experts say is the largest corporate-incentive package in U.S. history—in an effort to keep the jobs

And, back to my math: $8.7 billion over 16 years is about $544 million a year – or, more than three times what Missouri offered.

If we’re still talking about 2,000 jobs… that’s about $272,000 per job per year, courtesy of Washington state taxpayers.

Wow.

(Boeing, by the way, just distributed $3 billion as dividends and stock buy-backs.)

Yes, this is what has been going on, all across America.  Billions of dollars in government aid to corporations, even as Congress cut the Food Stamp program and rejected an increase in the minimum wage.

It’s a really good time to be a corporation.

Or a CEO.

Or a lobbyist.

(But not such a good time to be a US veteran.  More than a million veterans are minimum-wage workers who won’t see their pay increase.  And another million veterans just had their Food Stamp allotments cut.  Where are our priorities?)

The AFL-CIO Introduces New Website Highlighting CEO’s Outlandish Pay Inequalities

U.S. CEOs Paid 354 Times the Average Rank-and-File Worker—Largest Pay Gap in the World

New CEO pay numbers for S&P 500 released in 2013 Executive PayWatch

Searchable CEO-to-worker pay online database exposes growing wealth inequality and need for a fair tax system.
www.paywatch.org

CEO Pay 354 times the average worker (AFLCIO)
Coinciding with events by working families across the country on Tax Day, AFL-CIO President Richard Trumka unveiled the 2013 Executive PayWatch, revealing that U.S. CEOs of the largest companies made 354 times the average rank-and-file worker—by far the widest pay gap in the world. Last year, CEOs received on average $12.3 million while the average rank-and-file worker took home around $34,645. This new data confirms CEO-to-worker pay disparities have increased dramatically over the past several decades. Thirty years ago, CEOs were paid 42 times that of rank-and-file workers in the U.S.

The newly designed Executive PayWatch is the most comprehensive searchable online database that tracks excessive CEO pay at S&P 500 companies and offers visitors the unique ability to compare their own pay to the pay of top executives.

In addition to the new data on CEO pay, President Trumka outlined how PayWatch now exposes some of the ways that CEO-backed groups such as the Business Roundtable and Fix the Debt are drumming up a deficit scare to conceal their efforts to get more tax cuts for corporations, while hacking at Social Security, Medicare and Medicaid benefits for working people.

“American chief executives continued to do very well for themselves last year, while workers struggle to make ends meet,” said Trumka. “We are calling out the hypocrisy of rich CEOs who have the gall to ask for corporate tax cuts to be paid for by squeezing the retirement security of working America. The American public deserves to know the truth about their self-serving agenda.”

Closing the corporate tax loophole that allows U.S. multinational companies to avoid taxation on overseas profits would raise $42 billion in new revenue in 2013 alone. But CEO groups like the Campaign to Fix the Debt want to overhaul the tax system so that corporate profits kept overseas are permanently exempt from U.S. taxes.

Trumka also pointed to new features on PayWatch, including the AFL-CIO’s Mutual Fund Votes Survey, which examines votes cast by the largest mutual fund families to constrain CEO pay. This new letter grading system will help investors and the public compare how specific mutual fund families voted on executive compensation issues.

Finally, for the first time an interactive map allows users to compare and contrast CEO pay ratios of top executive all over the world.

“Not only is U.S. CEO pay out-of whack with historical norms, it is off the chart globally. For example, in Switzerland, where voters recently imposed new limits on executive pay, the CEO-to-worker pay gap is 148 times.  In the United Kingdom, the CEO-to-worker pay gap is one-quarter as large as ours. And in Japan, the gap is even smaller.” said Trumka.

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