If reality were measured like stocks in multiples of earnings, how much should we discount it?
Alert (and good-looking) reader Karen Quast sent a Feb 8 story from The Atlantic by entrepreneur Nick Hanauer, Amazon investor and founder of aQuantive, acquired by Microsoft for $6.4 billion. Called “Stock Buybacks are Killing the American Economy,” Hanauer’s treatise contends companies have shifted from investing in people and stuff to trafficking in earnings-management.
While Hanauer’s real target is sociological, he offers startling statistics compiled at theAIRnet.org. Companies in the S&P 500 have repurchased $6.9 trillion of stock the past decade including $700 billion last year.
The Sept 2014 Harvard Business Review ran a similar story by UMass professor William Lazonick called “Profits Without Prosperity.” Mr. Lazonick says S&P 500 components between 2003-2012 spent 54% of profits, or $2.4 trillion, on buybacks, and another 37% ($1.6 trillion) on dividends, thus sending 91% on to holders. What strikes me is that companies must’ve borrowed roughly $3 trillion more for buybacks.
Hanauer also nods toward GMO Capital’s ($120 billion AUM) James Montier, whose incendiary white paper “The World’s Dumbest Idea” (drawn from a Jack Welch observation) has been the subject of contention in the investor-relations profession and beyond. Montier claims a tally of buybacks from the 1980s forward shows firms repurchased more shares than were issued.
If that seems to defy the existence of the stock market (if more shares were bought than offered, how are there any to trade?), it doesn’t. There once were nearly 8,000 companies in the Wilshire 5000 while today it’s 3,750 (you’d think the Wilshire 5000 described the number of companies in it), a 53% freefall. But the big have gotten bigger, with US market capitalization about $2.8 trillion in 1988 and $25 trillion today (rewind to 1950 and total market cap was $92 billion – equaling just, say, Biogen Idec’s market cap now). (more…)