Blackrock (BLK) CEO Laurence Fink, whose company is the world’s largest money manager with $4.3 trillion in assets under administration, has called shenanigans on the nation’s biggest corporate leaders.
In a letter last month, Fink warns the leaders of S&P 500 companies that their short-term thinking is detrimental to sustainable long-term returns, which affects shareholders of all sizes.
The economy — most especially the jobs market — has been seriously stunted by the diversion of corporate funds from long-term capital investment to share repurchases and increased dividends. It might look good to investors, but in the end, it’s really just smoke and mirrors.
Fink advocates the use of patient capital, which includes investments in capital and plant equipment, product development, research and development as well as employee development.
Short-term thinking by CEOs is a Wall Street cancer, and for the sake of the nation, it needs to be stamped out — immediately.
Record Share Repurchases
S&P 500 companies spent $475.6 billion repurchasing their shares in 2013 — 19% higher than a year earlier, and an average of almost $1 billion per company.
Interestingly, the 19% increase was equal to the average daily stock price increase, meaning share repurchases barely kept up with market price. This suggests CEOs overpaid for their stock in 2013.
Regardless of whether you agree with my assessment, you should be concerned by the amount of money shelled out for this short-term bump in earnings per share. Especially when you consider that CEOs are destroying this shareholder value through dilutive equity awards to management. In many cases, the gains from share repurchases are nullified by excessive executive compensation. It’s poor capital allocation over any length of time.
Capital allocation has become a serious hot-button issue among large institutional investors. People like Fink believe that CEOs who fail to invest in their businesses aren’t doing their jobs effectively. Others, like activist investor Carl Icahn, believe that incumbent management is incompetent in many cases. In those situations, Icahn believes share repurchases and dividends are much safer options than deploying capital into poorly thought out or executed investments.
Basic opinions aside, I think both would agree that corporate nirvana exists when capex is strong and growth is prevalent. That can’t be achieved with short-term thinking.
Carl Icahn’s original demand from Apple (AAPL) was that it repurchase $150 billion of its stock using a combination of cash and debt to fund the buyback. That got watered down to $50 billion by the end of last September, and Icahn dropped his demands in February after Apple announced it had repurchased more than $40 billion of its stock during the past year.
Activist investors like Icahn are interested in extracting as much shareholder value as possible. You can’t blame them for doing whatever it takes to maximize their investment. However, when it involves adding debt while sacrificing capital expenditures, we’re talking about destabilizing the balance sheet to provide short-term shareholder relief.