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.
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.
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.
For 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.
As 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.
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Wondering 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.
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Yes, there’s more.
Verizon’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.)
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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.