People ask me why I am so negative on America. Not the least of my concerns is that U.S. corporations have long been splurging so much on buying back their own shares.
Of course, investors love the trend and, as an investor myself, I know that buybacks often do wonders for a share’s short-term performance. But there is a larger issue here that is usually swept under the rug: every dollar spent on a buyback is one dollar less invested in a corporation’s future. Put another way, when a corporation buys its own shares it is curtailing – often drastically – its long-term growth prospects.
According to the Boston-based economist William Lazonick, 419 top U.S. corporations spent $2.7 trillion in buybacks from 1997 through 2010. That is a sizeable piece of change and, in an increasingly competitive globalized economy, it surely has impaired these corporations’ long term prospects.
Just in the ten years ended 2010 alone, Exxon Mobil spent $174 billion, making it by far corporate America’s most ravenous self-cannibalizer.Microsoft came second at $110 billion, followed by IBM , Cisco, and Procter & Gamble with totals of $89 billion, $65 billion, and $57 billion respectively. Hewlett-Packard, Walmart, Bank of America, Pfizer, and General Electric rounded out the top ten.
Corporate leaders typically justify buybacks as an effort to use capital more efficiently and as a way of signaling confidence in the future. But Lazonick, who heads the Center for Industrial Competitiveness at the University of Massachusetts, suspects darker motives. For one thing buybacks are often timed to boost share prices just as executives cash in their stock options. In a major article in the Seattle University Law Review, he adds: “Given that U.S. companies are not required to announce the dates on which they actually conduct open-market repurchases, there is an opportunity for top executives who have this information to engage in insider trading by using this information to time option exercises and stock sales.”
As he points out, stock buybacks were virtually unknown until the early 1980s and they are still little used abroad. He goes on: “Trillions of dollars that could have been spent on innovation and job creation in the U.S. economy over the past three decades have instead been used to buy back stock for the purpose of manipulating the company’s stock price.”
A particularly interesting case is Apple. Hitherto notable as an exception to the trend (Apple figured nowhere in Lazonick’s list of top 50 buyback exponents in the ten years to 2010), the company has recently announced it is spending an astounding $60 billion on a buyback. It is clear the company was stampeded by corporate activist David Einhorn, who had been pushing for something to be done superfast about Apple’s cash mountain.
Of course, even after this massive purchase, Apple will hardly be strapped but there is a basic point here: as the most successful technology company in American history, it probably boasts better insights into future technology trends than any other U.S. corporation. Certainly to the extent that Apple shareholders will be tempted to recycle their buyback money into other technology investments (and surely many will), it is a fair bet that their choices will fall short of what Apple CEO Tim Cook and his team could have done with the money.
Yes, I know that Apple-bashing is now fashionable and that Cook stands accused of presiding over various product snafus. It is also true that even for experts, predicting technology trends can prove elusive. But that does not gainsay the old saw that “in the land of the blind, the one-eyed man is king.”
Certainly the larger point stands: America needs to invest for the future. Big investments require deep corporate experience. That is the way it always was in the pre-1980s era, and nothing has changed in the meantime to make large corporations — or their financial muscle — obsolete. Quite the reverse.