WASHINGTON — Weeks after he was sworn in as president, Donald Trump met with Harley-Davidson executives and union representatives at the White House, to win support for his tax-plan proposal:
I think you’re going to even expand — I know your business is now doing very well, and there’s a lot of spirit right now in the country that you weren’t having so much in the last number of months that you have right now.”
Proving the adage that even a broken clock is correct twice a day, Harley-Davidson is indeed growing. . . kind of. In February, the iconic manufacturer announced a plan to increase dividend payments to its shareholders by repurchasing 15 million shares of its own stock, valued at $696 million.
Simultaneously, the company announced plans to lay off 800 employees.
This best-of-times, worst-of-times narrative is fueled in part by low-interest rates — cheap money — and the Trump administration’s tax cut, which incentivizes the repatriation of profits made offshore. Companies in the U.S are repurchasing their shares at a record pace, driving up the stock price, and fattening dividend checks for their shareholders.
Workers’ paychecks? Not so much.
Corporations listed in the Standard and Poor’s Financial 500 Index have so far this year reported buying $158 billion of their own outstanding shares. With 85 percent of S&P 500 companies reporting, the figure is on pace for the largest volume of stock buybacks ever recorded — dating back to 1998, when data was first compiled.
Buybacks like the drink needed to steady a drunkard’s hands
Repurchasing shares appeals to corporate executives because it inflates the value of the company’s stock — not to mention their own bonus-heavy compensation packages — by reducing the pool of investors owed a share of the profits. As a result, S&P 500 companies are on pace to pay investors nearly $1 trillion in dividends for the 12-month period that ended in March.
The corporate buying spree has been widely hailed by the financial press. “The reason these companies are buying their stock is that they’re smart enough to know that it’s better for them than anything else,” said Charlie Munger, vice chairman of Berkshire Hathaway Inc., at the company’s annual meeting earlier this month. “Buybacks Surge, Steadying Market,” read a May 11 Wall Street Journal headline.
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Buybacks may indeed steady volatile stock markets but it’s a Pyrrhic victory, akin to plying a drunk with whiskey to steady his shaking hands. It’s a quick fix that doesn’t really resolve the underlying problem and may very well end up killing the patient. Noting that corporate executives seldom repurchase their company’s stock when the price is low, William Lazonick, an economics professor at the University of Massachusetts Lowell and head of the Academic-Industry Research Network, told MintPress:
These stocks are overvalued; they’re afraid the market will collapse.”
At the top of the commercial food chain, Lazonick said, stock repurchases have become systemic over the last decade, a kind of financial engineering that has begun to replace industrial engineering as the basis for accumulating profit — but little prosperity — in a U.S. economy that is no longer the world’s leading manufacturer of material goods. In short, Lazonick told MintPress, companies that used to create value, now simply extract it.
There are three ways to raise stock prices: innovation, speculation and manipulation. The first is accomplished by producing products that people actually want to buy, like an iPhone. The second is through speculation. That’s when people buy stock in a company that is developing an iPhone in 1991 at $25-a-share and by 2007 that same stock is worth $1,500-a-share. And the third way to do it is through manipulating the stock price.”
The problem with the “Shareholder First” strategy, as Lazonick refers to it, is that virtually all benefits accrue to the stock class and not the sweat class. Inequality widens, productive infrastructure rots. Said Lazonick:
The issue is what are they not doing when they do stock buybacks. What they’re not doing is keeping people employed longer, paying them more, and giving them more benefits. There’s a direct connection between the rise of buybacks for investors and a decline in living standards for everyone else.”
Valuing capital while devaluing work
In total, corporate America has committed 30 times more in resources over the last decade to repurchasing stock than it has to investing in its workforces, according to an analysis compiled by Lazonick and Emre Gomeç of the Academic-Industry Research Network, and Rick Wartzman, director of the Drucker Institute.
Forty-four companies on the S&P 500 have promised pay hikes to workers, through either cash bonuses or wage increases, as a result of the new tax windfall. Assuming that the companies in question reward a majority of their employees — which news accounts make clear is not the case — corporate largesse comes to about $5.2 billion, of which the bulk, $3.7 billion, is to be paid in one-time bonuses.
Take, for instance, the pharmaceutical conglomerate Pfizer. Just days before the tax cuts were signed into law in December, the company announced a massive $10 billion buyback as the prelude to a dividend hike. A few weeks later, Pfizer announced 300 employee layoffs and plans to suspend drug treatment research for Parkinson’s and Alzheimer’s.
Similarly, paper manufacturer Kimberly-Clark used its tax windfall to repurchase $2.3 billion worth of stock to fund a dividend increase, while simultaneously reducing its workforce by 5,000 jobs.
Over the past decade, Lazonick told MintPress, companies have given 94 percent of their profits right back to shareholders through dividends or buybacks. Between 2005 and 2015, companies on the S&P 500 spent $4 trillion buying back their own stock (as well as $3.9 trillion on increased dividends).
In a 2014 article for the Harvard Business Review, Lazonick wrote:
Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients — which include most of the highest-ranking corporate executives — reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.
The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings — a total of $2.4 trillion — to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.”
The road to unsustainable inequality
The trend towards buybacks isn’t good news for all investors either. Laurence Fink, the chairman, and CEO of Black Rock, the world’s largest asset manager, wrote in an open letter to corporate America in 2014:
It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”
Stock repurchases represent a seismic shift in the way Americans do business. From the end of World War II until the late 1970s, corporations adhered to a retain-and-reinvest approach in which management retained earnings and reinvested them in the physical plant, research and development, and most importantly their employees, who helped make firms more competitive. This model provided workers with higher incomes and greater job security, yielding what Lazonick calls “sustainable prosperity.”
But by the late 1970s, retain-and-reinvest had already begun to give way to downsize-and-distribute in which costs are reduced and the freed-up cash is then distributed among shareholders. As documented by the economists Thomas Piketty and Emmanuel Saez, this approach has seen the wealthiest 0.1 percent of the population pocket as much as 12.3 percent of national income on the eve of the Great Recession, or nearly a percentage point higher than its share on the eve of the Great Depression in 1928.
Lazonick thinks the solution to buybacks is simple:
They should be banned outright.”
Top Photo | President Donald Trump and Vice President Mike Pence meet with Harley Davidson executives and Union Representatives on the South Lawn of the White House in Washington, Feb. 2, 2017. AP | Pablo Martinez Monsivais
Jon Jeter is a published book author and two-time Pulitzer Prize finalist with more than 20 years of journalistic experience. He is a former Washington Post bureau chief and award-winning foreign correspondent on two continents, as well as a former radio and television producer for Chicago Public Media’s “This American Life.”