While we sleep, corporate execs strip-mine America

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.

CEO compensation: a growth story in America

A modern US corporation: Monsanto

Monsanto is famous for introducing large quantities of glyphosate-based herbicides (e.g., Roundup) to the biosphere, despite controversy over its toxicity. Why rely on research in the lab when you can use the world as your test tube? (Also see the MIT website about Roundup Ready Crops.)

Like so many other high-tech companies, Monsanto’s executives decided zaitech offered a better-risk reward ratio than biotechnology. So they massively borrowed to fund dividends and buy-backs, as shown by this slide from their October 2015 quarterly presentation…

The fanboy investment community applauded this bold application of “The World’s Dumbest Idea” (as aptly described by James Montier at GMO).

• “Monsanto Loads Up on “Fertilizer” to Grow Its Stock Price” at the Motley Fool (July 2014).
  “Monsanto is levering up to return cash to investors”.
• “Monsanto’s Buyback Has Become Quite Substantial” by Tim McAleenan Jr. at Seeking Alpha (Dec 2014): “historically cheap and is a fair starting valuation for a company with double-digit growth.”
• “Analyst Favorites With Strong Buyback Activity: Monsanto Ranks As a Top Pick” at the Online Investor (Feb 2015).
• “Barclays: Stocks With High Buybacks Make Better Investments” (April 2015) — So they do, in a euphoric bull market.
• “Monsanto Buyback Sets Stage for Higher Stock Price” at Barron’s (June 2015).

Monsanto’s executives delivered, reducing the share count by 12% during the past 2 years. But all games have an endgame, which Monsanto learned after the failure of their “hail Mary” offer to merge with their large competitor Syngenta. During the past five years they’ve bought their stock with an average price of $116; it closed at $88.06 yesterday (graph courtesy of StockCharts).

Expect no refunds from management, just more executive bonuses as they announced plans to fire (“separate”) 2,600 employees and spend $3 billion on “accelerated buybacks”.

Conclusions

Americans often delusionally refer to our leaders as “stupid” or incompetent, most notably after bank executives became fabulously wealthy from the mortgage bubble — and more so after the crash and government bailouts. That’s a common attitude of peasants towards their betters. Sometimes they even rise in futile peasants’ protests, burning off their anger while allowing rulers to identify and co-opt (or destroy) their leaders.

Citizens govern their nation by taking responsibility for its actions, rather than whining about them. The Founders gave us the machinery to run America. It sits idle today, rusting away, but can still become decisive if we use it. That will not remain true forever. Time is our enemy.

For More Information

To learn more about the new triangle trade, carrying away America’s future, see these articles. We cannot say that we were not warned.

• “‘Super managers’ governance spotlighted in economist Piketty’s blockbuster capitalism critique”, Reuters, May 2014.
• “The $2T Buyback Tax Ruse: It’s a Free Tax Ride for Corporations“, Gordon T. Long,  July 2014.
• “Corporate America Is Enriching Shareholders at the Expense of the Economy“, Douglas Skinner, 538, July 2014 — He sees half the equation, but ignores the role of executive stock options and doesn’t notice that the total of shares outstanding are not dropping as fast as buybacks imply.
• “Who are Today’s Supermanagers and Why Are They So Wealthy?“, Carter C. Price, Washington Center for Equitable Growth, July 2014.
• “The Fed’s Financial Repression At Work: How Big Blue Was Turned Into A Wall Street Slush Fund“, David Stockman, July 2014.
• “Profits Without Prosperity” by William Lazonick in Harvard Business Review, Sept 2014.
• Bloomberg’s excellent analysis of the “triangle trade”: “This Chart Shows How CEOs Get Rich by Dumping Cash on You“, July 2015.

If you liked this post, like us on Facebook and follow us on Twitter. To learn what we can do see the posts about Reforming America. Also see these posts about bubbles, about stock prices, and especially these…

• Watch corporations strip-mine their future (and ours).
• America enjoys a time of sunshine in Hell. Let’s use the time wisely.