As we round the corner coming into the final week of this month, the markets are showing a robustness that is probably more of a relief with abating trade tensions as the broader market was more a mixed bag with earnings reports. Case in point being my ongoing saga with Owens & Minor which announced their second dividend cut. At least they aren’t facing a SEC investigation à la Kraft Heinz. The common denominator in these two cases appear to be – at least in part – a laser focus on trimming costs with too much emphasis on the salary component.
Which leads to this week’s topic prompted by a private message which read in part: “… (I listen to) Pitchfork Economics with Nick Hanauer … (which) talked about stock buybacks and shareholder value maximization… I was hoping you could listen to it and let me know if everything they talk about holds up, or if there are pieces of the puzzle missing that might have been left out to steer a narrative. I don’t know what I don’t know and I don’t like thinking I might be getting misled. “
First half the battle is acknowledging a gap in understanding. Most of us only begin to realize this too late in life choosing to muddle through as best we can. Second, keep in mind the quote, “99 percent of all statistics only tell 49 percent of the story.” Ron DeLegge II
For my uninitiated readers, this podcast is targeted to the rising generational groups such as Millennials, Gen-Z etc. with a slight Socialistic slant. The New Green Deal (which I’m currently researching) resides in this category as well – (but with a twist). Anyway, there are three schools of thought to stock buybacks; they are good, they are evil or they’re neither. The podcast presents them as generally bad, the current administration treats them as good (no choice here as they were spurred on as a by-product of the tax plan). My personal view is under current law – particularly when the Supreme Court of the United States has granted to corporations the notion of “corporate personhood” – they are generally neither. I’m more of a guy that tries to eke out a profit regardless of the rules, knowing they will likely change at a future date and adjustments will be required.
Major Issues with the Podcast
- 11:44 – “Secondary offerings aren’t all that important”
- Depends on the type – if the secondary creates more shares to fund a new production line for instance, why would there be a penalty for a return to the original share count?
- 18:30 – 90% of corporate profits are returned to the richest people via dividends and stock buybacks.
- Wells Fargo is 62% owned by institutions and the number is about 15% for Walmart. Generally this reflects ETFs and mutual funds which are largely owned by individuals.
- 16:00 – shareowners are not investors.
21:07 – … buying stock is speculating not investing .
23:01 – … if you think shareholders are investors … that contributes to the growing economic inequality
- Only in the narrowest of definitions (buying an initial issuance or direct from a company’s secondary) is this true. Even as “traders” an economic interest with ownership rights is gained with the price (implied value) the speculation.
- 26:49 – chartered corporations existed to better society and for a limited time.
- These types of corporate structures were modified (initially in NC-1795) to circumvent perceived constitutional limitations on enforcement of multi-state investments (canals, railroads). They maintained a societal purpose including eminent domain rights (conversely, eminent domain is a New Green Deal issue as well).
- 33:32 – Wells Fargo … laid off employees while (enriching owners through buybacks).
- The layoffs were due primarily to exiting business lines in an effort to refocus on core operations reducing (in theory) the ongoing capability for malfeasance. Also to reduce overlapping operations (footprint acquired through acquisitions). It was not related to buybacks. In fact, Warren Buffett, the largest shareholder is precluded from owning greater than 10%. He is required to sell when buybacks are performed resulting in no short term enrichment.
The one point I hadn’t really considered in this debate was their point at 40:08 of a possible prohibition of buybacks if employees are receiving public assistance. I would add underfunded pensions and Sen. Marco Rubio’s (R-FL) position of taxing buybacks like dividends to the mix of potential areas to improve. One area requiring caution is the treatment of large private companies versus public ones. Examples that initially come to mind are Hobby Lobby, Cargill, Chick-fil-A and Koch Industries. None of the Democratic challengers has yet presented (in my opinion) a viable solution to improve the status quo without discriminating against any current stakeholder thereby cheapening their argument regarding equality.
So, while appreciating the question, my response is probably clear a mud as this issue is a tangled web with no clear right or wrong answer. Only that your instincts are correct in attempting to discern all the arguments to formulate your own opinion. My guess is this rebuttal does not fully address all the issues either – but my 2¢!
Any thoughts, opinions or other considerations that you have?