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Shareholders and Executives win, Jobseekers lose

Saturday, August 15th, 2009   4:42 am | Author: Bob | Economy, Work/Employment |
Tags: , ,

The corporate share buyback has accelerate recently as the markets tanked.


While this may be a good thing for corporate executives it is a terrible thing for those searching for jobs in this economy.


An article in BusinessWeek this week points out that with the jobless rate hovering around 10% it is unconscionable that companies are buying back shares instead of using that money to retain, hire or even expand their businesses.


Many of the share buyback plans wind up enriching their top level management teams with stock based compensation.


The BW article points out that


“The amount of money spent on buybacks is staggering. From 1997 through last year, 438 companies in the Standard & Poor’s 500-stock index spent $2.4 trillion on them. In 2007, as profits soared, the average buyback bill for each was about $1.2 billion—a record amount. And faced with a dramatic drop in their combined net income in 2008, these companies trimmed buyback spending, but not proportionately: The buyback-to-profit ratio, which was already unprecedented in 2007, more than tripled in 2008, from 0.90 to 2.80.


“Unfortunately, buybacks are rampant in industries where investment in innovation is crucial—energy, technology, and pharmaceuticals. ExxonMobil, America’s No. 1 repurchaser, spent $144 billion to buy back shares from 2000 through 2008—and almost $8 billion in first quarter 2009, the equivalent of 173% of its net quarterly income.”


“And five high-tech leaders—Microsoft, IBM, Cisco Systems, Intel, and Hewlett-Packard—are in the Top 10 of repurchasers, each having spent more on buybacks than on research and development from 2000 through 2008. (While spending $73 billion to buy its own stock, IBM increased its offshore employment by 133,000, reducing U.S. jobs by 36,000.) Pfizer, Johnson & Johnson, Amgen, and Merck have been big repurchasers, too, even as they have argued against regulating U.S. drug prices on the grounds that profits are needed to fund research. From 2000 through 2008, Amgen’s repurchases cost the equivalent of 116% of its net income.”


“The downturn has slowed buyback activity. But consider this: Some companies that fell into financial distress were previously among the largest repurchasers. If bailed-out General Motors had banked the $20.4 billion distributed to shareholders as buybacks from 1986 through 2002 (with a 2.5% aftertax annual return), it would have had $35 billion in 2009 to stave off bankruptcy and respond to global competition.”


“And the bailed-out banks? Eight of the biggest spent a total of $182 billion on buybacks from 2000 to 2007. That reduced their ability to cover their bets on derivatives, exacerbating the crisis they created in the first place.”


A review of share buyback plans is required and a balance developed between buybacks and using the money to retain existing and hire new employees particularly in times of economic turmoil.

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