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Walmart Buys Back $20 Billion In Company Stock Instead Of Raising Wages

Walmart announced a $20 Billion stock buyback yesterday.

From Business Insider: Walmart is using the oldest trick in the book to boost its stock price

$20 Billion is a whole lot of money.

  • It’s equal to almost $8,700 per full-time Walmart employee.[i]
  • It’s more than three times what taxpayers spend each year on health care, food stamps and other forms of public assistance for Walmart employees.[ii]
  • It’s 50% more than Walmart’s total profits last year.[iii]
  • It’s equal to about half of the company’s total long-term debt.[iv]

And Walmart directors have decided to spend all that money buying back shares of their own corporation’s stock.  Which doesn’t really do anything other than condense corporate ownership.

2005 photo of the Rev. Billy Talen leading the “Stop Shopping Choir”
by J.L. Sousa/Times-Herald Creative Commons license via Flickr

So rather than paying better wages to employees, or allowing more employees access to the company’s health insurance, or hiring more employees, or even just paying off corporate debt… Walmart directors want to spend $20 billion on reducing the number of shares of stock.

It’s all a question of priorities.  And condensing corporate ownership has been one of Walmart’s priorities for at least a decade.  Walmart has “repurchased” almost 30% of its shares since 2005.[v]

While taxpayers have been paying billions of dollars each year in public assistance to Walmart employees.

While Walmart employees have had to ask for public assistance, just to make ends meet for their families.

As the “Fight for Fifteen” movement[vi] continues, it’s worth asking:

If Walmart can afford $20 billion for more stock buybacks, why isn’t it already paying better wages to employees?

————

[i] https://finance.yahoo.com/quote/WMT/profile?p=WMT
[ii] https://www.forbes.com/sites/clareoconnor/2014/04/15/report-walmart-workers-cost-taxpayers-6-2-billion-in-public-assistance/
[iii] “net income” https://finance.yahoo.com/quote/WMT/financials?p=WMT
[iv] https://finance.yahoo.com/quote/WMT/balance-sheet?p=WMT
[v] http://www.macrotrends.net/stocks/charts/WMT/shares-outstanding/wal-mart-stores-shares-outstanding-history
[vi] http://fortune.com/2016/06/11/walmart-minimum-wage-study/

Dear Platform Committee: Stock Buybacks Should Be Illegal

Bernie Sanders Hillary ClintonThis weekend, the Democratic Party Platform Committee will put the finishing touches on the party’s official policy positions.

What’s not in there, yet?  A clear stand against corporate stock buybacks.

Hillary Clinton made buybacks part of her presidential platform almost a year ago.  Bernie Sanders has been talking about buybacks even longer than that.

But while the presidential candidates were talking about the issue, corporations spent $600 billion buying back their own stock. (And that’s just counting what the big corporations spent.)

If that money had been spent on new hires, rather than just on concentrating corporate ownership, it could have created almost 8.5 million jobs.  (That’s at the average US wage, including benefits.)

Image by Rose Lincoln, 1199SEIU

Image by Rose Lincoln, 1199SEIU

Imagine what the US economy could look like, if 8.5 million more of us were working right now.  Instead… well, you can read “US companies have spent $2 trillion doing something that has absolutely no impact on their business” for yourself here.  (That’s what the past five years of buyback spending adds up to: $2 trillion.  Yes, “trillion” with a “T.”)

Buyback spending drives up stock prices, which enriches corporate executives and investors who sell their stock.  But it’s not an investment in the corporation’s future – just the opposite, in many cases.  A lot of recent buybacks have been financed by new corporate debt, in a practice that one Wall Street insider described to me as “monetization of future revenues.”  They’re borrowing against future corporate revenues to pay stockholders now.  They’re mortgaging the future, rather than investing toward it.

This used to be illegal, back when the economy worked for the middle class.  This weekend, the Democratic Party Platform Committee should take a clear stand: it ought to be illegal, now.

Read more NH Labor News coverage about stock buybacks here.

Indiana Carrier Plant Workers Take Their Case Directly To UTC Shareholders

Members of the Indianapolis community rally behind USW Local 1999 on March 23, 2016.

Members of the Indianapolis community rally behind USW Local 1999 on March 23, 2016 after United Technologies announced they would be moving the plant to Mexico. Image by USW 1999

Steelworkers travel to shareholders meeting, deliver petition calling on Carrier’s parent company to reconsider moving production from Indianapolis to Mexico

United Technology shareholders came face-to-face with workers being destroyed by insatiable corporate greed.

On February 10th, United Technologies (UTC) announced its “business decision” to shutter the Carrier plant in Indianapolis and move production to Monterrey, Mexico.  The move would eliminate at least 1,400 jobs in Indianapolis. A video of the heartless announcement was posted on YouTube and has received more than 3.7 million views, drawing national attention to UTC offshoring plans.

On Monday, members of the United Steelworkers Local 1999 who work at the facility scheduled for closure traveled to the UTC shareholder meeting in Florida.  The USW members delivered a petition signed by 4,500 people, asking the company to reconsider moving their jobs to Mexico, and called on UTC to keep good, family-sustaining jobs in Indianapolis.

“Abandoning the Indianapolis plant will have a devastating effect on not only 1,400 workers, but also our families and our community,” said USW Local 1999 Unit President Donnie Knox. “UTC’s decision to move our jobs to Mexico and the video of a manager’s callous delivery of that devastating news to workers in Indianapolis have made Carrier and UTC into poster children for corporate greed.”

United Technologies’ greed is not unusual. It is exactly what many of the other American companies have done over the last thirty years.  Corporations sell out American workers, who labored to build the company from the ground up, only to watch their jobs shipped overseas so the stockholders can make a quick buck.

In October, United Technologies, Carrier’s parent company, used a stock buyback program to temporarily inflate the share price.  They announced plans to buy back $12 billion worth of the corporation’s own stock — boosting the price per share up by almost 5%.  UTC plans to spend another $3 billion later this year, to buyback even more shares. This is great news for the wealthy executives and Wall Street hedge fund managers who hold the majority of UTC stock (even though it’s one of the reasons for a recent downgrade in UTC’s bond rating).

What about the people who work for UTC?  Instead of reinvesting in the company, expanding current operations or increasing the wages of the hard working men and women who built the company, UTC decided to use all those billions to buy back their own stock.

Just imagine what that $12 billion could have meant for the 195,000 workers employed by UTC.

As if spending $12 billion to buy back their own stock was not bad enough, let us not forget that UTC also paid out dividends to stockholders.  In 2015, UTC paid a quarterly dividend of around $0.66 per share. This means that over the year UTC paid out $2.50 to all 843 million shareholders, totaling $2.1 billion dollars in dividend payouts.

That’s more than $14 billion total paid to stockholders in buybacks and dividends.  The amount of money would it take to keep these 1,400 workers in Indianapolis would be just a drop in the bucket, compared to what is being shelled out to stockholders.  The greedy executives do not seem to care about the workers, their families, or the city they will destroy when they close this factory.

Knox, and his fellow Steelworkers, delivered a petition with more than 4,500 signatures from Carrier employees and their supporters from Indianapolis and around the country, calling on the company to reconsider its heartless decision to abandon American workers.

Carrier’s decision to move these jobs to Mexico is what is wrong with too many American corporations. They no longer care about building a lasting company that employs as many Americans as they can, they only care about how they can boost their stock prices to further line their own pockets.

The members of Local 1999 are going to continue to fight until Carrier reverses their decision to send these jobs to Mexico.

On Friday, April 29, members of USW Local 1999 will take the fight to save their jobs to the streets with a march and rally at the Indiana State Capitol. The rally will be headlined by USW International Vice President Fred Redmond, U.S. Senator Joe Donnelly and AFL-CIO President Rich Trumka.


Here are three articles on United Technologies stock buyback program:

http://www.wsj.com/articles/united-technologies-unveils-12-billion-buyback-1445343580

http://www.reuters.com/article/us-utc-results-idUSKCN0SE1AR20151020

http://www.marketwatch.com/story/united-technologies-sets-6-billion-accelerated-buyback-2015-11-12


Related reading on stock buybacks from the NH Labor News:

Read the series about Verizon as a case study of what’s wrong with the economy, starting here.

Read “What Mitt Romney taught us about America’s Economy” here.

Read “McDonalds: Paying Billions (of Borrowed Money) to Stockholders” here.

Read more NHLN coverage of stock buybacks here.

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?

After Billions of $$$ to Stockholders, UnitedHealth Claims Poverty Due To Obamacare

By LaurMG, used by CreativeCommons license via Wikimedia Commons

By LaurMG, used by CreativeCommons license via Wikimedia Commons

SMH.

Yesterday’s 24/7WallSt article about UnitedHealth said that an “earnings warning” issued by the corporation “could be a serious blow to at least part of ACA/Obamacare.”

UnitedHealth’s latest advice to investors is that the corporation now expects slightly lower 2015 profits.  (Can’t help noticing: that recalculation includes a write-off of “$275 million related to the advance recognition of 2016 losses.” Nevermind that we haven’t actually gotten to 2016 yet; UnitedHealth is already calculating losses.)

Apparently, that press release was worth the headline “UnitedHealth Warning Creates Huge Spillover, With Big Implications Ahead.”

Just a month ago, 27/7WallSt was writing happier news about UnitedHealth. Quarterly earnings per share were better than expected, and better than 2014. Premiums were up 9.87% over last year. The company was adding about 100,000 new subscribers a month (1.7 million new people a year). And for the first three quarters of 2015, things were so rosy that UnitedHealth spent $1.1 billion buying back its own stock.

Plus, UnitedHealth paid out another $1.3 billion to shareholders in dividends, just in the first three quarters of 2015.

So… $2.4 billion paid out to shareholders in the first nine months of this yearand now suddenly there’s supposed to be some sort of crisis?  Wow.

Back to 24/7WallSt: “What has been interesting to see here is that UnitedHealth actually has seen its shares soar under ACA/Obamacare.”  Yes, that’s what happened.  The Affordable Care Act passed in 2010.  Here’s what UnitedHealth’s stock price history looks like:UNH stock chart

Looks like UnitedHealth’s profits are up since Obamacare, too.  Here’s what their quarterly earnings-per-share history looks like:Am I the only one having a hard time seeing how this is a problem for UnitedHealth?

Back to 24/7WallSt. The headline from last month’s article: Are UnitedHealth Earnings Enough for Investors?

Hmmn.  Is investor greed the real crisis for Obamacare?

— — — —

insuranceYep, there’s more.

As of yesterday, the corporation’s new profit expectations “reflect a continuing deterioration in individual exchange-compliant product performance.”  Yep, they’re talking about policies sold to individuals through ACA exchanges, which apparently are not “performing” very well.  From the press release: “UnitedHealthcare has pulled back on its marketing efforts for individual exchange products in 2016. The Company is evaluating the viability of the insurance exchange product segment and will determine during the first half of 2016 to what extent it can continue to serve the public exchange markets in 2017.”

In other words: individual policies aren’t “performing” very well, from the corporation’s perspective.  So UnitedHealthcare may stop selling them.

UnitedHealth is currently the largest health insurance provider in America. Other large health insurance providers – Anthem and Cigna, Humana and Aetna – have plans to merge, which “could shrink the number of major companies in the health insurance industry from five to just three. And that could mean fewer options and higher rates for consumers and the employers that provide health insurance.”

And according to yesterday’s 24/7WallSt article, UnitedHealth’s (newest) earnings forecast “could be used by the companies to support those pending health insurance mergers.”  Apparently on the theory that the four other insurers are too small to compete in the individual policy “product segment.”  (Even though Centene Corp. and Kaiser Permanente seem to be doing just fine.)

Am I the only one wondering why UnitedHealth’s latest earnings warning would justify the mergers of its largest competitors?  Given the corporation’s “soaring” stock price.  Given the corporation’s growth in earnings-per-share.  Given the fact that the UnitedHealth paid out $2.4 billion to shareholders just in the first nine months of this year…?

Am I the only who remembers that Obamacare was intended to rein in profiteering by insurance companies?

Remember what it was like, back then?  “In the midst of a deep economic recession, America’s health insurance companies increased their profits by 56 percent in 2009, a year that saw 2.7 million people lose their private coverage.  The nation’s five largest for-profit insurers closed 2009 with a combined profit of $12.2 billion.”

So, yeah, I suppose someone could “blame” Obamacare for UnitedHealth’s current financial situation.  And the fact that UnitedHealth’s per-share profit (EPS) is 75% higher now than it was in 2009.

But if anybody’s going to start passing blame around, now that “the 2016 presidential election has brought the health care argument up more times than can easily be counted”…

I think we should also be talking about whether Obamacare managed to stop the corporate profiteering, like it was supposed to.

— — — —

Can’t help noticing…

Yesterday’s headlines were fueled by the sudden drop in UnitedHealth’s stock price, which followed its revised earnings statement.

But that was yesterday.  So far today, the stock price has recovered more than half of yesterday’s decline.

Which still leaves the stock trading at about four times its price in 2009.

— — — —

Read more NHLN coverage of stock buybacks here.

Big Banks: Paying Billions (of Borrowed Money) to Stockholders

NASDAQ Watch Photo by Kowloonese used under CreativeCommons license via Wikimedia Commons

Photo by Kowloonese; used by CreativeCommons license via Wikimedia Commons


The “new economy” in a nutshell:
full-time employees need government assistance because their wages are so low. Businesses are shrinking, not growing. And corporations are borrowing money to pay it out to stockholders… because, well, that’s what the system is designed to reward.

The more I look, the more I see it. The same pattern, almost everywhere. It’s not limited to just a few rogue companies. It’s not limited to just a few industries.

And it’s not getting any better.

Here’s the view, from the financial sector.

Remember that study showing that almost one-third of bank tellers receive food stamps, Medicaid or other public assistance? The authors calculated that taxpayers pick up the tab for almost $900 million in government aid – just to bank tellers – each year. That study didn’t break those costs out by particular employer, but…

— — — —

Bank Teller Counting Money for Customer --- Image by © Duncan Smith/Corbis via Flickr

© Duncan Smith/Corbis via Flickr. Used under CreativeCommons license.

According to Glassdoor, Bank of America tellers receive an average wage of $12 per hour – or, just about poverty-line wages for a hypothetical full-time employee supporting a family of four.

And the corporation just announced another set of layoffs, bringing the total to

  • about 14,300 jobs eliminated in the past year
  • about 69,000 jobs eliminated in the past five years.

But owners of the bank’s common stock are doing OK. So far this year, the corporation has distributed $3.1 billion to shareholders, through dividends and stock buybacks. And there will be even more money going to stockholders in December.

Can’t help noticing, though… Bank of America has issued a lot of bonds this year – more than $25 billion. Which means the corporation now has more than $270 billion in long-term debt that it has to pay off between now and 2047.

Yes, Bank of America is borrowing money at the same time it’s paying money out to stockholders.

(Which, yes, is sort of like running up your credit card to buy Christmas presents for people who already have everything.)

Wondering how stock prices are affected by the amount of money paid to shareholders?  Last year, Bank of America announced it would increase dividends and start buybacks – but then discovered an accounting mistake and had to withdraw those plans. And stock prices fell by 6.3%.

Want to know why corporate executives care so very much about short-term stock prices?  Look at the way Bank of America compensates its CEO. On the 13th of every month, Brian Moynihan receives the cash equivalent of 17,747 shares of common stock. In August, the per-share price was $17.62; for 17,747 shares, that works out to a payment of $312,702. In September, the per-share price was $16.04; that works out to $284,662. In October, the per-share price was only $15.52; that works out to $275,433. Don’t you think CEO Moynihan notices, when his monthly payment drops by ten or twenty thousand dollars?

But there’s good news for him: this month – after that latest set of layoffs was announced – the per-share price is back up above $17.  (Even though the Bank is $270 billion in debt and its credit ratings are, ahem, less-than-stellar… and it borrowed almost another $3 billion since CEO Moynihan’s October payment.)

— — — —

bankerAccording to Glassdoor, J.P. Morgan bank tellers also receive an average wage of $12 per hour… which is still, yes, about the poverty line for a hypothetical full-time employee trying to support a family of four.

And the corporation is, ahem, “cutting costs” by eliminating another 5,000 jobs. (Last year, they cut 7,900 jobs.)

But… stockholders are doing OK. The corporation just raised its dividend and is buying back $6.4 billion worth of its own stock. (That’s in addition to almost $18 billion in buybacks between 2010 and 2013.)

And CEO Jamie Dimon just got tagged as “the Best Big Bank CEO, Measured by Shareholder Returns.” Between buybacks and stock dividends, Dimon has “generated a total shareholder return of 119.5%” in the last decade.

Even though… can’t help noticing… J.P. Morgan had, at last report, $434.4 billion in long-term debt (which was an increase of $8.3 billion from the previous quarter). And it will be paying off debt through 2049.

I’m sure somebody at JP Morgan can explain why it makes sense to pay billions out to stockholders at the same time the corporation is borrowing billions. (And I’m sure somebody at the Federal Reserve Bank can explain why regulators approved this plan.)

And yes, folks high up the corporate ladder are doing OK, too. Their compensation includes mechanisms like restricted stock units and stock appreciation rights, which ensure they’re paying attention to share prices.  For instance, Managing Director Mary Erdoes just received stock appreciation rights equal to 200,000 shares of JP Morgan stock… on a day when the stock closed at $67.39 a share.   (Yep, some people get paid according to how high the stock price goes.)

Meanwhile… 5,000 JP Morgan employees will be looking for new jobs… and employees who still have their jobs get poverty wages and need government benefits to make ends meet.

— — — —

US states by poverty rate

States by 2013 poverty rate

And I’m betting that if I looked, most of the other Big Banks would show this same paying-low-wages-to-employees while cutting-rather-than-expanding-the-business while borrowing-against-future-revenues so they can pay-more-money-to-stockholders pattern.

It’s not just a few employers.

It’s not just a few industries.

Borrowing money in order to pay it to shareholders is the same basic thing Bain Capital was doing, back before journalists started writing about it, when Mitt Romney ran for President.

Only, this is on a bigger scale.

These are corporations that employ hundreds of thousands of people. And they’re borrowing against future revenue, in order to pay stockholders today.

While their executives rake in millions in compensation.

And their employees need government assistance just to get by.

— — — —

Read my last post, “McDonalds: Paying Billions (of Borrowed Money) to Stockholders” here.

Read my series about Verizon as a case study of what’s wrong with the economy, starting here.

 

McDonald’s: Paying Billions (of Borrowed Money) to Stockholders

Photo by Annette Bernhardt via Flickr

Photo by Annette Bernhardt via Flickr

Right there, in the USNWR story “Why McDonald’s stock is blowing the competition away,” was the clearest example yet of how our economy doesn’t work for anybody but the folks at the very, very top.

The company will cut $500 million [in costs] by 2018… it has a goal of having 4,000 stores refranchised in three years… it’s returning $30 billion to shareholders, an increase from $20 billion, through dividends and share buybacks and funded by taking on more debt.

And because of this strategy…

The famed restaurant chain has seen its stock jump by 17 percent since September.

Yes, McDonald’s. The corporation that costs taxpayers an estimated $1.2 billion a year in public assistance, because so many of its workers need government help to make ends meet. One of the employers who provoked the Fight for 15.

Yes, McDonald’s. The corporation whose per-share book value has dropped by 20% over the past decade … while its financial leverage (debt level) has more than doubled. The corporation that just saw its credit rating downgraded again, because Moody’s is concerned about “the company’s recent announcement that it intends to increase its returns to shareholders, the vast majority of which will be funded with additional debt.”

The corporation that has only $5.7 billion in net tangible assets (roughly $6.24 per share).

Yet the stock price hit $114 per share this week.

Because McDonald’s will be distributing an additional $10 billion to shareholders, “the vast majority of which will be funded with additional debt.”

(Even while its employees need $1.2 billion a year in food stamps and other assistance.)

— — — —

Image by Rose Lincoln, 1199SEIU

Image by Rose Lincoln, 1199SEIU

McDonald’s long-term debt will, as Moody’s noted, “limit its financial flexibility” for decades to come. Remember, the corporation eventually has to pay all that debt back, plus interest.  So basically, the corporation is using future revenues to pay stockholders now.

Moody’s expects the corporation to borrow even more as it increases its payments to stockholders.  At the same time, McDonald’s is selling off its assets, by “refranchising” 4,000 stores.

And Wall Street rewarded this strategy.  The stock price hit a record high this week… because McDonald’s will be distributing $30 billion, rather than only $20 billion, to shareholders.

And some McDonald’s executives took advantage of that record highChief Administrative Officer Peter Bensen reportedly exercised stock options to buy 15,870 shares – and then sold them the same day – making what I calculate to be a $1.2 million personal profit. Executive Vice President Richard Floersch exercised stock options to buy 23,910 shares, and then sold them – making a profit that I calculate at more than $1.3 million.  Executive Vice President Kevin Ozan also exercised stock options, buying 3,463 shares and then selling them at what I calculate to be almost $268,000 in profit.

And Executive Vice President David Fairhurst sold every share of McDonald’s stock he owned, that day of the record high.

Meanwhile… McDonald’s employees are receiving $1.2 billion in annual government assistance, because their wages are so low they can’t make ends meet.

And the financial press is trumpeting the fact that McDonald’s will be “cutting costs” – usually a euphemism for employee layoffs or wage reductions – by half a billion dollars.

— — — —

And no, I’m not the only one who thinks that our economy is being ruined by this fixation on short-term payouts to stockholders.

— — — —

Read “What Mitt Romney taught us about America’s Economy” here.

Read my series about Verizon as a case study of what’s wrong with the economy, starting here.

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.

 

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