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Corporations have been making money just fine—but economic growth has been slow, productivity stagnant, and job creation limited. What gives?
The following figure, which comes from a Brookings report on the negative consequences of the financialization of the U.S. economy, provides one explanation. It shows that corporations increasingly prefer to fund dividends and stock purchases (the green line, left scale) rather than productive investment (red line, right scale).
In fact, according to a Bloomberg Businessweek article, corporate spending on stock repurchases is heading for a record:
Corporations report profits as earnings per share (EPS). By reducing the number of shares outstanding, buybacks help increase a company’s EPS. . . . Companies in the S&P 500 bought more than $550 billion of their own stock last year, boosting EPS growth by 2.3 percentage points, according to data compiled by Bloomberg.
The last time buybacks contributed as much to profits was in 2007, when companies spent the most ever on their own stock and enhanced that year’s increase in EPS by 3.1 percentage points.
Buyback announcements so far in 2015 have already topped full-year totals for 2008, 2009, 2010, and 2012, and they’re on pace to reach an annual record of $993 billion, according to Birinyi Associates. . . .
Since 2009 companies have spent $2.4 trillion on buybacks, drawing criticism from politicians who say the companies should use the money to hire workers, pay them more, build plants, and fund research.
The figure below illustrates this trend.
In a telling comment, the Bloomberg Businessweek article actually quotes analysts who share the view that corporations are being forced into this behavior by the lack of “attractive” alternative uses for their funds:
Over the previous 12 months [U.S. companies have] generated $1.1 trillion in profits—a sum that “cannot possibly be reinvested back” as capital spending or research and development, says Dubravko Lakos-Bujas, an equity strategist at JPMorgan Chase. “Cash flow generation for U.S. companies has been very robust, balance sheets have remained pretty healthy, and interest rates are still low,” he says. “With growth fairly anemic, it’s extra reason for buybacks.” Or as BTIG’s Greenhaus puts it, “Companies have to do something with their cash.”
An interesting perspective, one apparently shared by most corporations—investing money in productive, job-creating, environment-supporting activities is a distraction from the real work of making profits.