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Nightmare on Wall Street? Are Stock Buybacks Creating Another ‘Financial Bubble?’

An American flag festooned with dollar bills and corporate logos flies in front of the Supreme Court during oral arguments in the case of McCutcheon v. Federal Election Commission.  Image by JayMallin.com

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:

FedEx:

  • 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.

wall_streetThat 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.

Cisco:

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.

Bloomberg News:

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.

wall street bullAnd 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 every single unemployed American.

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.

soap bubbleAnd 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.

Why the Economy Doesn’t Work for the 99%: Massive Payouts to Corporate Stockholders

We Are the 99 Percent photo by Gawain Jones via Flikr Creative Commons license

Photo by Gawain Jones via Flikr Creative Commons License

Wondering what happened to America’s Middle Class? UMass Lowell professor William Lazonick has some numbers for you.

  • Since 2004, top US corporations have paid 86% of their net income to stockholders through dividends and stock buybacks.

Why that’s important: Money paid out to stockholders is not available for long-term growth investments such as R&D, opening new facilities, updating equipment or hiring new employees. It’s also not being used to give raises to current employees. But I’m digressing. Back to Professor Lazonick:

  • And 86% is just the average return to stockholders. Professor Lazonick names 15 corporations that spent more than their net income on dividends and stock buybacks, including: Time Warner (280%); DirecTV (192%); Hewlett-Packard (168%); Pfizer (137%) and Home Depot (134%).

Wonder how corporations can pay more out to stockholders than they receive in net income? Here’s one possible answer: they can borrow the money. From May 20, 2014 Time Warner Inc. Prices $2.0 Billion Debt Offering: “The net proceeds from the issuance of the notes and debentures will be used for general corporate purposes, including share repurchases.” (Remind you of…say, What Mitt Romney Taught Us About America’s Economy?)

But I’m digressing again. Back to Professor Lazonick, again:

  • The top corporations kept paying dividends through the recent recession, with a barely-noticeable drop between 2008 and 2010. “[T]hrough boom and bust, dividends were stable, and on the rise from 2010. In 2004 mean dividends were $349 million; in 2013 double that amount at $685 million.”

Repeating that: an average of $685 million in dividends per company. Paid out to stockholders, not reinvested in the business. Just in 2013.

Wondering what effect that has on America’s economy? Here’s one example, using a company that paid out much less than $685 million in dividends:

http://2bgr8stock.deviantart.com/art/Money-Cash6-117258936 By 2bgr8STOCKLast year, we estimated what FedEx CEO Fred Smith received – personally – in dividend income: “According to SEC filings, he owns about 15 million shares of the company.  Last year, FedEx paid out a total of 55 cents per share in dividends.  Do the math… and it looks like Mr. Smith received about $8.5 million in dividends (not counting dividends to his family holding company, his wife, or his retirement fund).” Also last year, we estimated what that meant in the larger scheme of things: “his 15 million shares in the company represent only a fraction of the outstanding stock. For Mr. Smith to receive $8.5 million in dividends, personally, the company has to pay out well over $100 million in total dividends – money that could have been invested in new hires, or new planes, or new facilities (or improved employee benefits).”

Now, compare that $8.5 million that we calculated he received as dividends with his $13.7 million “compensation package” that was reported about the same time.

Hey, maybe we did the math wrong. Maybe Mr. Smith didn’t actually get two-thirds again as much in dividends as he got in official “compensation.” It’s really, really hard to track dividend payments to corporate CEOs – that information is not reported anywhere that we have been able to find.

But doesn’t it seem possible that Mr. Smith’s decisions about how FedEx treats its workers… could perhaps be influenced by the fact that he gets a substantial share of the dividends paid out to stockholders? Read FedEx And The Real Reason Why There’s No Jobs: Cut Back On Worker Hours And Raise Profits. Also remember that a federal appeals court just ruled that FedEx improperly classified 2,300 California drivers as “independent contractors” rather than “employees”… to the tune of “hundreds of millions of dollars.”

BTW, it’s not just difficult to track dividend payments to CEOs… it’s also hard to track the effect of stock repurchasing programs on CEOs.

Going back to Mr. Smith… Late last year, FedEx announced plans to buy back up to 32 million shares – or, about 10% of outstanding stock. Since then, the market price of its stock has risen by about $35 a share. Multiply $35 per share by the roughly 15 million shares Mr. Smith owns… and you’re talking some serious numbers.

Not to repeat myself (again), but: that type of information isn’t tracked anywhere. At least, not anywhere we could find.

Going back to Professor Lazonick:

  • The corporations in his survey spent 51% of net income on stock buybacks.

Yep, must be lookin’ real rosy up there in the corporate offices. Extrapolating from our FedEx example, can you imagine how much all those different stock buybacks have enriched America’s CEOs?

EGTRRA signingAnd as near as I can tell, it’s going to keep lookin’ rosy in corporate offices as long as our federal tax system encourages this sort of thing. Ever since the Bush tax cuts, investment income has been taxed at a much lower rate than wage income. Are we really surprised that CEOs are taking more compensation in stock options and awards, rather than traditional wages?

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Meanwhile, yesterday’s New York Times hosted a “Room for Debate” on the policy implications of Professor Lazonick’s research.

Want to know how deeply ingrained the “No New Taxes” ceiling has become, in our public discourse?

Not a single policy expert quoted in that “debate” even suggested that America should return to taxing investment income at the same rate as wages.

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#dejavu

My “Why the Economy Doesn’t Work for the 99%” post from last year is available here.

Why the economy doesn’t work for the 99%

Today’s New York Times has a really good picture of what’s happened to America’s economy over the past 50 years.

Please take a few minutes to look at it, and pay particular attention to what’s happened since the Bush tax cuts started going into effect in 2001.

  • Corporate profits are at their highest level ever.  After-tax corporate profits were 5% when the Bush tax cuts started taking effect — now they’re at 9.7%.
  • Wages are at their lowest level level ever.  When the Bush tax cuts started taking effect, 46.7% of the gross domestic product was paid to workers as wages — now it’s 42.6%.
  • Corporate taxes are at almost-record lows.  Corporations paid 30% of their profits as taxes, when the Bush tax cuts started taking effect — now they pay 21.6%.
  • Personal taxes have also dropped.  Taking all taxpayers together (the 1% as well as the rest of us), individuals paid 17.8% of their incomes as taxes when the Bush tax cuts started taking effect — now, it’s 14.1%.

Remember, the Bush tax cuts were supposed to be temporary.  They were supposed to “stimulate the economy” and then expire in 2011.

Instead, the Republicans in Congress have used one fiscal crisis after another to keep most of those tax cuts in place.

Top Tax Rates 1952-2008And now they’re talking as if those Bush-era tax rates are a ceiling, not a floor.  (Read “Corporate Tax Cuts are almost twice the Sequester cuts” here.  Read about the $161 billion annual cost of the dividend and capital gains tax cuts here.)

Republicans in Congress keep agitating about the federal debt — but they’re not willing to raise revenues by returning to historical tax levels.  No, the GOP keeps insisting that the only way to address the debt is by cutting “entitlements”.

Let’s use real words, here, so everyone knows what the choice comes down to.  Translated from GOP-speak, “entitlements” are Social Security, Medicare and Medicaid.  (Remember, you have paid into the Social Security and Medicare trust funds with every paycheck, for as long as you’ve been working.)

So here’s the choice:

  1. Congress can continue to let the federal debt grow.
  2. Congress can return taxes to historical levels.
  3. Congress can cut Social Security, Medicare and Medicaid.

Congress is going to be making this choice over the next two and a half months.  The current federal budget expires on September 30th — about the same time that the federal government will hit the debt limit (again).

Go back and look at those New York Times “what happened to the economy” charts again.

Don’t you think it’s time to finally end the Bush tax cuts?

 

Changing the Conversation – Earned Benefits are NOT Entitlements

(Photo by Robert Neff)

Social Security and Medicare are not “entitlements” – except in the sense that everyone should be entitled to the money (including interest) that they deposit in a bank account.

Our grandparents, parents and now you and I pay into these programs with every check we receive.  Pull out your paystub and look.  You will see deductions for FICA and for Medicare.  Why are these programs being included in conversations surrounding the “Fiscal Cliff”? 

For decades now, right-wing think tanks like the Heritage Foundation have been telling us we must “replace the culture of entitlements with one of mutual responsibility.”  But workers have always been responsible.  The only irresponsibility here belongs to Congress, who started borrowing from our fund  beginning in the Reagan years.

The Social Security Act of 1935 was a bipartisan accomplishment.  Politicians on both sides of aisle knew that disabled veterans returning from war, widows with dependent children and retirees to old to work, needed help.  This was not a government handout – it was a plan through which each employee would pay an income tax.  The money would be pooled together, and with interest, payments would be made to qualified recipients.

Why are some politicians trying to make us believe that Social Security is bankrupt?  The NH Sentinel Source.com reported in April 2011 that, “working Americans have paid so much in Social Security payroll taxes during the past three decades that they have built up a $2.6 trillion surplus in the account.”  Unfortunately, this account is now filled with “IOU’s” – and some politicians prefer to change the rules rather than looking at long-term solutions.

Senator Kelly Ayotte is one who believes that Social Security should be cut.  She voted for the Ryan Budet, which, according to the Kaiser Foundation, would harm 3.3 million people between the ages of 65-66.  This is not a reasonable answer or solution to the country’s fiscal situation.  Politicians should be protecting – not sacrificing – these programs that employees have paid into, all these decades.

It is up to all of us as American workers to ensure these programs will be there when we need them.  This begins with changing the conversation – and in particular, the wording.  Social Security and Medicare are not entitlements but Earned Benefits.  Our politicians must understand we will not give up on what is rightfully ours.

Promises, promises…

A lot of promises were made, back when the Bush tax cuts were first enacted.

Back in 2001, the Heritage Foundation projected that:

  • “Under President Bush’s plan, an average family of four’s inflation-adjusted disposable income would increase by $4,544 in fiscal year (FY) 2011, and the national debt would effectively be paid off by FY 2010.”
  • “The plan would save the entire Social Security surplus and increase personal savings while the federal government accumulated $1.8 trillion in uncommitted funds from FY 2008 to FY 2011.” (“Uncommitted funds” is a fancy way of saying “surplus”.)

Did your family’s disposable income increase by $4,544 last year? (Wondering how the top 1% are doing? Browse through “How to Spend It” here.)

Has the national debt been paid off?
Is the Social Security surplus “safe”?
Has your family been able to increase your savings?

What happened to the $1.8 trillion federal surplus that was supposed to appear, after the tax cuts stimulated the economy and the “job creators” created jobs?

Lots of promises were made, back when Republican Leadership was forcing the Bush tax cuts through Congress. [Historical footnote: both the 2001 tax cuts and the 2003 tax cuts were passed in a way that made them exempt from Senate filibuster. In 2003, the Senate vote was 50-50 after Republican Senators John McCain, Lincoln Chafee and Olympia Snowe voted “nay”; and Vice President Dick Cheney cast the deciding vote to enact the bill.]

Those promises never panned out. But now, Republican leaders in Congress are acting as if high-income taxpayers are somehow entitled to the low tax rates they have been enjoying for the last decade

What’s up with this idea of “entitlement”?

Millions of American workers have paid into the Social Security system for decades, based on the promise that we would get Social Security benefits when we retired. Isn’t it reasonable for all of us workers to think we’re entitled to the benefits we contributed to? But now, Congressional Republicans are insisting on “adjustments to eligibility and benefits in the Social Security and Medicare programs.”

One man – Dick Cheney – cast the deciding vote to give the wealthy their tax cuts; but now Congressional Republicans think those tax cuts are somehow sacred. Just two days ago, Senate Minority Leader Mitch McConnell told a hometown newspaper that any “fiscal cliff” deal “must not raise taxes on wealthy.”

Sense of “entitlement”?

“Gifts” from the government?

The Bush tax cuts were supposed to “jump-start” our economy. They were supposed to “trickle down” and enrich working families. They were supposed to eliminate the country’s debt. They didn’t do any of that – but now Congressional Republicans want us to pay the price, through cuts to our Social Security and Medicare benefits.

Didn’t they get the memo? Romney-Ryan lost.

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