Much has been said about large US corporations selfishly hoarding trillions of dollars of cash, instead of investing it in the US economy. This has caused very weak US economic growth as well as modest improvement in US unemployment and US underemployment, which both are still unreasonably high. It has also caused further expansion of the huge economic gap between the wealthy and everyone else.
And while this has happened, which has wrecked the US economy, the US Congress, and also the US Fed, has just sat there and twittled their thumbs.
But not much has been said about large US corporations, by taking advantage of the incredibly low interest rates due to US Fed action, continuing to buy just monstrous amounts of their common stock back, instead of using that money to invest in the US economy, which is desperately needed to create good-paying US full-time jobs.
How big a deal are these common stock buybacks? Well, just huge.
Let me explain just one of them, so you will be able to better understand what is going on here all throughout the US Big Corp environment.
Everyone is familiar with DirecTV, which is a very well run company.
They just reported annual 2012 net income of $2,949 mil dollars, an increase of 13% over the $2,609 mil earned in 2011.
But get this.....DirecTV also reported 2012 annual Earnings Per Share (EPS) of $4.58, up 32% over the $3.47 earned in 2011.
So, what's with the incredibly huge gap between its earnings growth of 13% and its EPS growth of 32%? Yeah, that's right, its EPS growth is 2.5 times the growth in its earnings.
Well, it's all about math, and the computation of EPS. In 2012, it spent $5.2 bil in buying back its own common stock. Thus, it had 14% fewer common shares outstanding in 2012 as compared to 2011.
The EPS numerator is its earnings. If a company has a lot of cash available, which many now do, it knows that with the extremely low interest rate environment created by the US Fed, it will lose little of earnings if it uses this cash to buy back its common stock. And companies that have a significant debt situation, know that because of the extremely low interest rate environment created by the US Fed, it can borrow additional money very cheaply.
On the other hand, the EPS denominator is its average number of common shares outstanding.
If the earnings numerator effect of stock buybacks is small, but yet its denominator effect is large, like it is in DirecTV's case, the impact on EPS can be substantially favorable, like it also is in DirecTV's case.
So, the 98%, including small businesses, get harmed by these large US corporation substantial common stock buybacks. By spending this money like this, nothing is done to stimulate the US economy and create US full-time jobs.
So, who benefits from these massive common stock buybacks? Clearly, DirecTV common stockholders, since EPS and EPS growth drive the market price of common stocks.
But, there is an especially huge benefit to the top executives of DirecTV.
In its proxy statement filed with the SEC, DirecTV disclosed that in 2010, Michael White, its CEO, had a reasonable amount of Salary of $1.4 mil. However, he also was awarded DirecTV company stock valued at $14.7 mil and also awarded DirecTV common stock options of another $12.5 mil.
So, clearly DirecTV's CEO benefits dramatically from DirecTV's massive common stock buyback program that is severely harming 98% of the country.
And the US Congress just sits there twittling its thumbs while it is happening. And the US Fed has facilitated this financial conduct which severely expands the already huge gap between the very wealthy and everyone else.
The clear solution is that the US Congress should impose a stiff annual fee on all excessive common stock buybacks by companies each year. And the US Government money raised here should be used to help solve the severe sequester problem the country is facing.
