But all games have an endgame.
By Larry Kummer, Editor of Fabius Maximus, a multi-author website with a focus on geopolitics:
Nothing shows how America’s reins are held 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, buybacks 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 about $120 billion 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.
Today’s example: 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 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 buybacks, 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 from StockCharts).
Expect no refunds from management, just more executive bonuses as they announced plans to “separate” 2,600 employees and spend $3 billion on “accelerated buybacks.” By Larry Kummer, Editor of Fabius Maximus
And what might spark a crisis? Read… US Economy Flies into “Coffin Corner,” But We Don’t Mind!