Wednesday, April 16, 2008

3 Takes on Investment in the United States: 1

Floyd Norris's blog discussed the level of stock buybacks. This subject relates to the discussion of the relative importance of savings and investment for the economy.

Norris, Floyd. 2008. "Profits Plunge, Buybacks Don't." (7 April). New York Times Blog
The corporate love of buying back stock -- which Wall Street encourages as much as it can -- reached new heights late last year. Standard & Poor's, which has been tracking buyback data for the S.&P. 500 since 1998, reports that in the fourth quarter of last year, companies in the index had net reported profits of $68 billion -- and spent $141 billion buying back stock. That was the first quarter in which the companies managed to spend double their net income in buybacks. The third quarter of 2007 had been the first time that buybacks exceeded profits for the companies.

With that surge, 2007 goes down as the first year in which buybacks exceeded profits for an entire year. The major companies of America, as a group, are acting as if they are in liquidation and have few good investment opportunities.

In the fourth quarter, profits were down 62 percent from a year earlier, and share buybacks were up 35 percent. Howard Silverblatt, S.&P.'s keeper of the numbers reports that over the last 13 quarters, since the buyback boom started in the fourth quarter of 2004, the companies in the index reported net earnings of $2.1 trillion. They paid out $721 billion in dividends and spent $1.4 trillion in buybacks. Their total capital spending came to $1.6 trillion.

Companies -- the non-financial ones, that is -- still have plenty of cash, so Mr. Silverblatt thinks buybacks will continue at a high level, although not as high as in 2007. One reason for buybacks is to avoid dilution of earnings from the exercising of stock options. Another is to boost reported earnings per share.


Eleanor said...

Okay. US companies are buying back their own stock, rather than investing in capital improvement...
I guess I have two questions. Why buy back stock? Is it to prevent take overs? Or simply that they have a lot of money that they don't want to spend on capital and have to spend on something. How does this tie in with financialization?

I have The Confiscation of American Prosperty in my bag for light reading on the bus.

Michael Perelman said...

Wonderful. I hope that you like the book. Executives' bonus's are tied to stock value, which is supposed to be an index of performance. Buying up stock increases the prices and so the bonuses go up -- for not investing.