Corporate Profits and Stock Buybacks

United Technologies Corporation is an enormous multinational organization. In 2015, they had over $56 Billion in revenue, made over $6.5 Billion in profits, had over $7 Billion in cash and cash equivalents, along with another $10 Billion in Accounts Receivable they hadn’t collected yet. Their total assets were $87.5 Billion against total liabilities of $58.5 Billion.

Consider that they’re in the news of late over one of their subsidiaries, Carrier Corporation, moving one of their manufacturing plants to Mexico to save on labor costs and increase profits accordingly. American workers will lose their jobs, with the pay and benefits that go with the job, so that Carrier, and ultimately United Technologies can squeeze a few more bucks onto the bottom line profits. Now you may be thinking, well that’s just good business. Let’s look at a few details that don’t get as much press.

United Technologies is a publicly owned corporation. Its stock trades openly on the US markets and the stock price reflects investors current opinion on the value of the company overall, divided by the outstanding number of shares, and the company’s future prospects. To be a good investment, UTC’s stock needs to increase in value over time from the current market price. When more investors feel optimistic about the company’s prospects, they buy the stock and drive the price higher. Conversely, when investors get spooked by the outlook or see better opportunities elsewhere for investment dollars, they sell and the stock price declines. Basic stuff I know.

Much of the corporation’s executive compensation is stock compensation. The CEO and high ranking members of the corporate hierarchy are paid in Stock Options or Restricted Shares so that they are fully invested in ensuring the company performs as expected so that the stock price reflects the performance, and the executives pay is tied to it in large part. It’s interesting to consider that this is a very inexpensive way for the company to pay their executives, because they aren’t paying them at all. They’re giving them pieces of paper representing shares in the company’s profits, that the execs can then sell to investors to get the income. In other words, the investors pay the execs. Large investors like pension plans, mutual funds and the like aren’t too keen on these kinds of compensation deals as they feel it dilutes their investment in the company. When the CEO and his executive colleagues sell their stock options on the open market, those shares add to the outstanding number of shares and have made every investor’s share of the company pie a little bit smaller. But the corporation has a way of making everyone happy. They offer to buy back their own shares on the open market, in effect “retiring” those shares and keeping the total outstanding shares under control, no matter how much stock they give away to their execs.

I could go into some length about the financial wisdom of this kind of stock manipulation as compensation, but I want to focus on one thing in particular in light of current events at Carrier. From UTC’s 2015 10 K (Annual Report):

“On November 11, 2015, we entered into ASR agreements to repurchase an aggregate of $6 billion of our common stock. Under the terms of the ASR agreements, we made the aggregate payments on November 16, 2015 and received an initial delivery of approximately 51.9 million shares of our common stock, at a price of $98.26 per share, representing approximately 85% of the shares expected to be repurchased. The shares associated with the remaining portion of the aggregate purchase price are to be settled over six tranches. Upon settlement of each tranche, we may be entitled to receive additional common shares or, under certain limited circumstances, be required to deliver shares or make additional payments to the counterparties. The final settlement of the transactions under all tranches is expected to occur no later than the third quarter of 2016.”

United Tech bought a hell of a lot of their own stock, shrinking the number of shares outstanding, which makes their per share earnings higher and their large investors very happy. The wisdom I mentioned earlier is whether paying $98.26 a share for UTC stock was a good investment for the company to make. Could those $6 Billion dollars have been invested more wisely in the actual business? Discuss among yourselves.

I will point you to another section of the 10 K: the Statement of Cash Flows. I want to illuminate one specific thing that will hopefully make you raise an eyebrow.

Investing Activities of Continuing Operations:

Capital expenditures

  • $1,652,000,000

Investments in businesses

  • $538,000,000

Dividends paid on Common Stock

  • $2,184,000,000

Repurchase of Common Stock

  • $10,000,000,000

United Tech spent $10 Billion more on paying their shareholders cash dividends and buying back stock to prop up their stock price and make their wealthy shareholders happy, than they did on actual nuts and bolts for their manufacturing! Updating plants and equipment, improving safety conditions, buying new warehouses, etc. all fall under Capital Expenditures. The total cost spent on all of their businesses was less than what they paid out in dividends on their common stock. Yet they just have to move a manufacturing plant to Mexico and layoff American workers to save money.

I’ll leave you with one more little tidbit to mentally chew on. United Technologies paid more in income taxes to foreign nations than they did to the United States of America.

  • $3.7 Billion to foreign lands
  • $2.7 Billion to the good ole’ US of A.

So the next time you hear about corporations moving jobs overseas because it’s too expensive to keep the jobs in America, you will know that underneath all the emotional headlines and patriotic buzzwords designed to make you willing to give tax breaks to multi-billionaires so they’ll bestow a job upon you, the real culprit is simple, unabashed greed.

compensation-restrictions

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