Corporate America Is Enriching Shareholders At The Expense Of The Economy

[applegrove]

Corporate America Is Enriching Shareholders At The Expense Of The Economy

FiveThirtyEight

http://fivethirtyeight.com/features/corporate-america-is-enriching-shareholders-at-the-expense-of-the-economy/

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Economics 101 tells us there are basically two things you can do with your money: Spend it and enjoy the benefits of your new purchases today, or invest it — with the hope that you’ll make more money in the future. This basic trade-off between consumption and investment applies to companies as well. Over the past decade, the balance in corporate America has swung toward consumption, raising concerns about the U.S.’s future economic growth.

Let me explain what “consumption” means in a company’s case. Rather than saving its money to grow the business, the company gives back whatever money it has made in profits to its owners, or shareholders. A company can do this in two ways: paying dividends or buying back its stock. Either way, the result is the same: The money’s no longer available for the company to pour back into the business. In 2012, U.S. nonfinancial companies1 returned nearly $560 billion to shareholders — more than double what they paid out just a decade earlier.


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What is less well-known, however, is that a relatively small group of large U.S. blue chips — companies including Coca-Cola, McDonalds and IBM — has substantially increased the amount of cash it has returned to shareholders. In 2007, before the financial crisis, U.S. companies returned $673 billion in cash to shareholders, which represented 90 percent of aggregate corporate earnings. That’s a mind-boggling amount of money. About three-quarters of this amount is attributable to a small set of very large companies, which increasingly dominate the distribution of earnings and payouts.

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The bottom-line is that market pressures — investors’ insatiable desire for ever-larger dividends and buybacks — are forcing large U.S. companies, which are vital to our economy, to pay out more cash than ever before, raising questions about where their future earnings — and, ultimately, the U.S.’s overall economic growth — will come from. Equally troubling, this mania for buyouts is taking place when the market is at record highs, in part to try and juice earnings to sustain these valuations. Not to be a doomsayer, but is hard to see how all of this ends well.



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[ClarkeVII]

1. This what "old school" publically traded companies have always done...

The Coca-Cola's, McDonald's and IBM's of the world are not exactly growth companies and should not be viewed as such. To get people to buy their stock they return money (earnings) to investors. Coca-Cola has been a publicly traded company for roughly 100 years and they pay-out a 3% dividend to shareholders every year. The Google's and Facebook's of the world are much newer and pay no dividend because they choose to reinvest their earnings. I think the article or author may not understand this but the money doesn't just disappear. It goes back to the shareholders so they can chose to reinvest in any avenue they please (growth or value).

[BuelahWitch]

2. Kick! n/t