Come gather ’round people
Wherever you roam
And admit that the waters
Around you have grown
“Sir, if you have a milkshake and I have a milkshake and my straw reaches across the room, I’ll end up drinking your milkshake.” – Senator Albert Fall
Come gather round doctors, lawyers, and accountants and let me tell you the tale of the Skim and the Partial Ponzi. You won’t hear this story in mainstream publications, largely because it’s not sensationalistic and takes place very, very slowly over a long period of time. Plus, the documentation and scrutiny required of traditional media makes the subject a non-starter for any editor. Nevertheless it has a huge impact on 99.99% of U.S. citizens. So heed the call small-business owners, professors, journalists, students, and retirees.
To start, let me share with you two sets of data:
1. According to a study by Standard & Poor’s equity analysts Todd Rosenbluth and Stewart Glickman, in the 18-month period ending June 30, 2007, 423 companies in the S&P 500 engaged in stock buybacks and repurchased almost 20 billion shares of stock for approximately $700 billion dollars. Yet the number of shares outstanding for these 423 companies was only reduced by 4.4 billion. What happened to the other 15.6 billion shares? Both the study and I conclude that they were simply repurchased to offset the dilution of employee/executive stock and option grants.
2. Companies in the Standard & Poor’s 500 Index were poised to spend $914 billion on share buybacks and dividends in 2014, or about 95 percent of earnings, data compiled by Bloomberg and S&P Dow Jones Indices show. S&P 500 companies will spend $565 billion on repurchases this year (2014), and $349 billion on dividends, based on estimates by Howard Silverblatt, an index analyst at S&P. Profits would reach $964 billion should the 8 percent growth forecast by analysts tracked by Bloomberg come true.
Distilling the above two sets of data, we get the following:
78% of shares repurchased by companies in the S&P 500 have no effect on shrinking the float – they are a complete wash in terms of boosting net earnings. (15.6 billion/20 billion = 78%)
58% of net income for the S&P 500 companies is being spent on stock repurchases ($565 billion/$964 billion)
Finally, we combine the two percentages above to come to the conclusion that if 58% of net earnings are used to repurchase stock, and 78% of that stock is actually going to executives and employees, then:
45% of the total earnings of the S&P 500 are completely fictitious as it pertains to the average common shareholder (78% of 58%).
Yeah, yeah, yeah, there are a lot of holes that can be poked in the above. One of the most obvious is the timing differences of the two sets of data 2006-7 vs. 20141. Another that critics might point to is the fact that stock options and particularly stock grants, are already expensed and accounted for in net income. (of course if they are, then why is there 15.6 billion shares in leakage?)2 I’ll leave my detailed rebuttal to these in footnotes, but for the sake of brevity, let’s just slash the 45% number listed above to 25%. That’s still a pretty jarring cut, and it means that those shares of stock or the equity ETF’s that you hold in your 401K, really only entitle you to 75% of your share of the companies earnings. Worse, that percentage is slowly going down.
The other 25%, and growing, has been usurped by management. We’ll detail exactly how that’s occurred in the next few weeks, so stay tuned to The Shadow Banker…
Are Buybacks an Oasis or a Mirage? – “U.S. equity investors in aggregate—contrary to appearances—have not realized a benefit from the recent spate of stock repurchases”
Buybacks That Bite Back – the original Glickman/Rosenbluth article detailing the stock buyback “leakage”
S&P 500 Companies Spend Almost All Profit on Buybacks – more like 58% of profits
Goldman Sachs Partners Reap $175 Million from ’08 Options – “In December 2008, Goldman Sachs granted 36 million options in an effort to give top performers an incentive to stay after the bank reduced compensation expense by almost half during the financial crisis” Huh???? In December of 2008, where the hell else were they going to go???
Top 100 CEO Retirement Savings Equals 41% of U.S. Families – they’re skimming it from the bottom of the economic pile, and from the doctors, lawyers, and scientists at the top
Why Management Loves Share Buybacks – “The conclusion is that what looks like buybacks are actually thinly veiled management-compensation plans”
- $565 billion in stock buybacks in 2014, versus an average of $467 billion in 2006/7. Both periods occurred in a year of large stock buybacks by corporations, as highlighted in both stories below [↩]
- I don’t know if this is a critique of my argument, or makes the 45% even worse. I think it’s due to low balling the option valuations, a continuation of the backdating of option strike price’s (the consultants approved it, now they probably have come up w/ new schemes) and huge stock grants doled out when stock prices are low – think Goldman Sachs’ bonanza to employees in late 2008/early 2009 [↩]