Buybacks and Dividends Update
We noted earlier this year that dividends and buybacks had consumed consumed all profits and more since 2004. This is not healthy given that growth should be at least partially funded out of retained earnings, given the ephemeral nature of capital markets.
This trend continued into the third quarter of this year.
Three numbers, courtesy of Howard Silverblatt of Standard & Poor’s, shed some light on what companies did with their cash during boom times:
Over the last four years, since the buyback boom began, from the fourth quarter of 2004 through the third quarter of 2008, companies in the S.&P. 500 showed:
Reported earnings: $2.42 trillion
Stock buybacks: $1.73 trillion
Dividends: $0.91 trillion
As a group, every dime they made, and more, went to shareholders.
Roughly $2 went to shareholders who sold out for every $1 that was paid
in dividends to shareholders who held on to their shares.
Ideally, companies would be buying back debt and stock now. However, over the past five years, companies tapped the capital markets not only to fund all capital expenditures but also to fund buybacks and share repurchases. Now, capital markets are under extreme duress and companies are having to pay usurious rates of interest to fund operations.
It sure would be nice if corporate America had more financial flexibility amidst the worst credit crisis in 75 years.
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