Friday, March 8, 2013

Big 4 US Defense Contractors Paid $43 Bil to Buy Back Their Own Common Stock in Past 8 Years

Let me get the politics out of it by focusing on the most recent 8 years.....4 years when George W. Bush was President and 4 years when Barack Obama was President.

During those 8 years, the Big 4 US Defense Contractors spend nearly $43 bil.....yeah, that's half of the current year sequester buy back their own common stock.  And this $43 bil of spending was 49%, or nearly half of their Cash Flow From Operations, or in other words, nearly half of their Earnings on a Cash Basis.

So, just where did these Cash Earnings come from?  From the US Government, on in other words, from US taxpayers.

US taxpayers are paying for these Big 4 US Defense Contractors to buy back $43 bil of their own stock.  I'm not kidding.  And we want to know why the US Government has such a huge Debt load?

So, why did these Big 4 US Defense Contractors decide to spend this $43 bil to buy back their own stock?

Well, it's all about maximizing reported Earnings Per Share, as well as Earnings Per Share growth, both of which determine what common stocks sell for.

And when the Executive Compensation of the Top Executives of these Big 4 US Defense Contractors is overwhelmingly common stock based, it only makes sense that to maximize their wealth, they direct the company, with the blessing of their Board of Directors, to buy back massive amounts of their company's own common stock.

So, why it is that these common stock buybacks increase reported Earnings Per Share, as well as Earnings Per Share growth?

Well, the US Fed has driven much of this by creating an extremely low interest rate environment.  Thus the financing costs to buy back common stock is very minor.  But the number of common shares outstanding drops with the stock buybacks.  Therefore, mathematically, the earnings are spread over a fewer number of common shares outstanding, thus the bump up of Earnings Per Share.

In a recent post, I showed that these Big 4 US Defense Contractors generated total 2012 annual earnings which were precisely the same as 2011, thus the total earnings growth was 0.0%.

However, on an Earnings Per Share basis, the total earnings of these same Big 4 US Defense Contractors climbed 5.4%.  I'm not kidding.

Big 4 US Defense Contractor Corps 2012 Annual Earnings Precisely Flat, But EPS Up 5.4%

And this hugely positive spread between the Earnings Per Share growth and the Earnings growth has been going on for many years.

Ask any investment analyst what happens to the value of a common stock when you increase its long-term earnings growth rate by 5.4% per year?  The common stock intrinsic value goes to the moon.  And this also tells you one of the main reasons why the US stock market has increased so much over the past 4 years and also why the overall US economy and the middle class and below haven't participated in this huge wealth enhancement of the already very financially well heeled.

It's bad enough for a huge majority of all major US corps to take advantage of this, all fueled by the US Fed's low interest rate policy.

But when the US Government, and thus US taxpayers, directly provide the funds which permit these Big 4 US Defense Contractors to take advantage of this gigantic economic bonanza, it takes US Congressional lack of oversight to a completely different level.

And is it fair?

Clearly not, since you have to be a publicly-held company to be able to take advantage of it.  Small businesses and individuals are out to lunch on this massive economic benefit bestowed by the US Fed on US Big Corps.

Below here is a summary of the money spent to buy back their own common stock, as well as the Cash Flow Generated From Operations by each of these Big 4 US Defense Contractors for the most recent 8 years:

Purchases Cash

Of its Own Flow

Common From

Stock Operations

8 Years 8 Years

2005-12 2005-12 %

mils $s mils $s

Lockheed Martin 16,209 28,424 57%
Northrop Grumman 10,653 19,825 54%
Raytheon 9,872 17,134 58%
General Dynamics 5,924 22,026 27%

Total all 4 42,658 87,409 49%