Summary: Nothing shows how America’s reins are held by the 1% than our out-of-control corporations, enriching their executives at the cost of the future of their businesses — and ours. Here’s another status report on this sad but fixable story.
The Q2 Buybacks Report by FactSet is, as usual, sobering reading. During the 12 months ending in June, companies in the S&P 500 spent $555.5 billion repurchasing their shares. For the first time since October 2009, buy-backs exceeded free cash flow (cash flow after capex); they’re borrowing to buy back shares.
For the past two years buybacks have run at the fantastic rate of ~$120 B per quarter — the same rate as in 2006-2007, with tech companies the leaders. In 2014 they spent 95% of their profits on buybacks and dividends (building the future is somebody else’s problem in corporate America).
Investors applaud this as a boost to share prices. Surprising to the naive, a decade of buybacks has reduced the S%P 500’s share count by only 2%. Share buybacks are one part of the triangle trade that transfers vast fortunes from shareholders to senior executives using stock options:
- executives exercise their options when shares rise (i.e., the company sells shares to executives at a discount to current prices),
- the executive sells those shares to the public,
- the company buys back those shares from the public.
Net result: the company has less money, their executives have more, the share count is unchanged.
This is an example of how America’s senior executives have learned to treat running companies — even running them into the ground, as Carly Fiorina did at HP — as a sideshow to their real job of financial engineering (for their personal profit). During their boom the Japanese called these financial games zaitech (cursing it after their crash in 1989). Stock options, tax avoidance, earnings manipulation, mergers and acquisitions (almost all of which fail; see articles at CBS and HBR) — these are the paths to success for execs in New America.