The New York Times published an interesting article May 21 that looked at the Marx ratio, which is defined as a company’s profit per employee divided by the median wage of its employees; it tells us generally how much a public company rewards its shareholders in comparison to its employees. Numbers below 1 mean the company is returning more to employees than shareholders, while numbers above 1 means the opposite.
If you’re like Larry Fink, CEO of BlackRock, Inc. (NYSE:BLK), who believes CEOs should do more than generates profits for shareholders, you will be interested in my seven companies doing right for employees.
If, on the other hand, you don’t care a whit about the employees and want your quarterly dividend check and some capital appreciation on top of that, the ratio named after the socialist economist is probably not your thing.
However you might feel about the subject, author Neil Irwin makes it clear that there are limitations to the Marx ratio.
“The Marx Ratio should not be used as a definitive measure of how a company does or does not contribute to inequality,” wrote Irwin. “Rather, think of it as an important clue about how it is organized, how its economic structure works, and to whom its greatest rewards tend to flow.”
According to Irwin, of the 394 S&P 500 companies that reported their median compensation by May 3, the median Marx ratio was 0.82, meaning the typical company did the right thing and rewarded employees at a higher rate than shareholders.
Amen to that.
S&P 500 Companies Doing Right for Employees: American Airlines (AAL)
Marx Ratio = 0.24
Profit per worker = $15,158
Median worker pay = $62,394
When it comes to airlines, Southwest Airlines Co (NYSE:LUV) is my favorite stock recommendation. That said, I’m a firm believer in companies treating their employees well because that always trickles down to the customer.
Like many of the airlines, the past few years have been profitable for AAR. Maybe not as good as they were before bankruptcy — see its operating margin of 9.3% in fiscal 2008, double what it was in 2017 — but I’m sure the company’s executives will take them.
American Airlines has almost 127,000 employees with median annual pay of $62,394, four times its 2017 profit per employee. A greedy shareholder would like the Marx ratio to be higher (i.e., a higher profit per employee) but a lot of people lost their jobs to keep the airline flying; the profits are just fine where they are.
Currently, American is reconfiguring its older 737’s to match the configuration of its newer 737 MAX’s. This move is not going over well with its flight attendants. In a push to maximize revenue, AAR CEO Doug Parker might want to have a look at its current Marx ratio.
S&P 500 Companies Doing Right for Employees: United Technologies (UTX)
Marx Ratio = 0.31
Profit per worker = $22,205
Median worker pay = $72,433
United Technologies Corporation (NYSE:UTX) recently announced that it’s selling Taylor Co., a subsidiary that manufactures ice cream dispensing equipment and frozen-drink machines, to Middleby Corp (NASDAQ:MIDD) for $1 billion so that it can focus on its commercial refrigeration business.
This is just the beginning of a complete strategic review of its entire portfolio that could see the business split into three units with the commercial refrigeration business along with its air conditioning business being one of them; Otis elevators and its jet engines & aerospace business being the two others.
Anytime you have a business with lots of engineers, you’re going to have a higher average salary because they’re not cheap to pay — and rightly so, given that the types of businesses they often work revolve around safety.
If you fly on planes regularly, you don’t want its Pratt & Whitney jet engine business being cheap when it comes to paying employees. Bad engineers equal bad outcomes for everyone.
United Technologies’ stock hasn’t done much this year, up less than 2% year to date through May 21. Perhaps that’s why activist investors have been pushing for change at the company.
Long-term, UTX is a winner.
S&P 500 Companies Doing Right for Employees: Merck (MRK)
Marx Ratio = 0.42
Profit per worker = $34,696
Median worker pay = $82,173
If you’re looking to make a quick buck, Merck & Co., Inc. (NYSE:MRK) isn’t the stock for you. One of the best healthcare companies out there, the sector is in the middle of a correction that’s seen drug manufacturer stocks drop by almost 2% year to date through May 21 while MRK is up nearly 5%.
Over the last ten years, Merck’s averaged an annualized total return of 6.8%, with almost 60% of the return from dividends. It’s an income investor’s dream stock.
In Merck’s first-quarter report, it made $1.05 a share on a non-GAAP basis, 16% higher than a year earlier. In the past three months, analysts have jumped on board Merck stock with the number of buys jumping from 11 to 17. I’m not a big believer in analyst opinions, but when you get this many changing their tune at one time, it’s a sign good things are happening at the drug company.
S&P 500 Companies Doing Right for Employees: Boeing (BA)
Marx Ratio = 0.52
Profit per worker = $58,217
Median worker pay = $111,204
Of the seven stocks doing right for employees, Boeing Co (NYSE:BA) has the second-highest median worker pay at $111,204 or almost double its profit per employee.
With almost 141,000 employees worldwide, the profits add up quickly. In 2017, Boeing had $11.8 billion free cash flow; in 2018, FCF could approach $19 billion or $135,135 per employee.
Although Boeing’s business is flying high right now, labor troubles could be brewing.
On May 21, the Wall Street Journal reported that 178 technicians at its 787 Dreamliner plant in South Carolina had been authorized to vote on joining the International Association of Machinists union on May 31.
Boeing is appealing the ruling by the National Labor Relations Board. Last year, almost three quarter’s of the South Carolina plant’s workers voted not to join. Naturally, Boeing’s not pleased, nor should it be given how much it pays its employees.
Union skirmishes aside, Boeing stock is heading for the clouds. Next stop, $400!
S&P 500 Companies Doing Right for Employees: Anthem (ANTM)
Marx Ratio = 0.54
Profit per worker = $38,286
Median worker pay = $70,867
My InvestorPlace colleague Chris Lau recently called Anthem Inc (NYSE:ANTM) boring. Frankly, owners of ANTM stock couldn’t receive a bigger compliment.
If you’re not familiar with Anthem, it’s a provider of health and specialty care insurance plans through its various subsidiaries to more than 41 million people across the U.S.
“Anthem is the most attractive of the bunch [other health care plan providers] at its modest 22x P/E and manageable debt/equity of 0.75 times. Earnings will grow in the 10 percent range and the mid-teens over the next five years,” Lau wrote May 4. “Prudent management, cost cuts, and higher efficiencies all lead to the potential for strong shareholder returns in the years ahead.”
With the company’s new CEO doing a good job containing medical costs while looking for bolt-on, opportunistic acquisitions rather than costly M&A blockbusters, Anthem investors should look forward to future positive revisions to its earnings guidance.
S&P 500 Companies Doing Right for Employees: Netflix (NFLX)
Marx Ratio = 0.55
Profit per worker = $101,623
Median worker pay = $183,304
If there’s a business better suited to leading-edge technology, I’d love to know about it, because Netflix, Inc. (NASDAQ:NFLX) pivoting from DVDs to video streaming in 2007 has to be one of the biggest business decisions ever made by a CEO of a public company.
Reed Hastings will forever be remembered as the guy who changed television for the better.
InvestorPlace contributor Luke Lango recently discussed why Netflix’s content is getting better. He reasons that the company’s quarterly subscriber growth seems to follow three-month increments where the content is good rather than mediocre.
I’ve argued in the past that spending billions on content is the key to Netflix’s success. The more it generates in operating profit per subscriber, a function of the quality of content Lango refers to above, the higher its share price will go.
They say if you can’t explain an investment in a sentence or two, it’s not worth making.
“Netflix buys and streams video content through a monthly subscription.”
Pretty simple, isn’t it?
S&P 500 Companies Doing Right for Employees: BB&T (BBT)
Marx Ratio = 0.78
Profit per worker = $66,193
Median worker pay = $84,550
As I stated in the opening, the median Marx ratio of the 394 S&P 500 companies who had reported their median compensation by May 3 was 0.82, which means the typical company has higher median pay than profit per employee.
Of the major banks, only BB&T Corporation (NYSE:BBT) has a Marx ratio below 0.82 at 0.78. In fact, the average of Wells Fargo & Co (NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corp (NYSE:BAC) is 1.21 or 56% higher.
Why does that matter?
It shows that BB&T balances profits with employee pay, a sign of a properly managed, thoughtful and considerate business.
On April 19, BB&T announced first-quarter earnings of $745 million, 97% higher than a year earlier. On a per-share basis, Q1 2018 EPS was 94 cents, 104% higher than a year earlier due to fewer shares outstanding.
The company delivered record earnings in the quarter due to excellent control of its expenses combined with lower taxes as a result of the corporate tax rate cut which saw the company’s effective tax rate drop by 490 basis points to 19%.
Related to the Marx ratio, BB&T increased its hourly pay rate by 25% to $15 per hour. When you pay the people on the front line better, everyone wins, including shareholders.
I’m not very familiar with BB&T, but the mere fact it’s willing to invest in its people suggests to me that I ought to take a much closer look.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.