The New R&D: Repurchases and Dividends

The New R&D: Repurchases and Dividends

Joshua M Brown

May 30th, 2013

“If you look at total R&D growth, including the corporate and government side, the U.S. is now at the low end. We’re seeing other countries, from Germany to Korea to China, make much bigger bets. And if that persists for long enough, it’s going to have an impact.”
– Rob Atkinson, president of the Information Technology and Innovation Foundation (ITIF)

Shut up, Rob.

What do you mean America doesn’t do R&D anymore? We do it all day long – so long as the R&D we’re talking about means Repurchases & Dividends.

Buybacks, payouts, more buybacks, more payouts – it’s like Candyland for the 20% of America that owns 90% of the stock market and everyone else can go wait in the Home Depot parking lot where we’ll pick them up to dig us a swimming pool later on.As of the end of 2012, we hit a 13-year high in the amount of S&P 500 companies paying a dividend. Dividend payout ratios are close to their median level, but they’re at their highest level since the recession hit in 2007. Last year the S&P 500 distributed $310 billion in dividend cash to shareholders – where were you, at the mall? This was a 22% jump over 2011’s $255 billion payout  – quite a growth rate compared to the economy’s paltry 2%. You’re either in or you’re out.

Speaking of the S&P, the dividend payout ratio is 2%, which makes the rate on our savings accounts look like a joke. In the meantime, corporations are sitting $1.4 trillion in cash, tech stocks alone are hoarding some $500 billion! This means that payouts can still increase like a bastard.

Right now, S&P 500 companies are paying out roughly 30% of their earnings as dividends. This is actually far below historical norms. In the 1960’s and 1970’s it was far more common to see a 40% payout ratio. From 1981-2000, this ratio was closer to 50%. It only got more conservative on the heels of the dot com crash. And now it’s coming back.

And where there isn’t cash, private equity firms are happy to borrow the money to pay out to shareholders now. Even Dr. Dre wants his damn dividend and Blackstone or KKR will make damn sure he gets one. Companies with vast stores of cash overseas don’t even have to repatriate it – witness Apple floating a bond offering to get liquid for a “shareholder appreciation night”, at which they’ll be doling out dividends and ice cream sundaes in little batting helmets.

And how about the repurchases? It’s insane how many shares are being retired, thus boosting earnings per share and share prices themselves.

Here’s Factset: “Dollar-value share repurchases amounted to $93.8 billion over the fourth quarter and $384.3 billion for 2012. The fourth quarter total is in-line with that of Q3, but represented year-over-year growth of 9.6%.”

Ka-boom!

That’s R&D, bitch!

JPMorgan estimates what the impact to earnings has been from all this activity (via Tyler): “Of the change in S&P TTM operating earnings between Q3 2011 and the just completed Q1 2013, a stunning 60% or $2.20, of all “gains” of $3.70 have been the result of buybacks. The remainder: a tiny $1.50 is due to actual organic growth. This means that nearly 60% of the bridge between the LTM operating earnings of $94.60 as of Q3 2011 to $98.30 at Q1 2013 has come from corporate management teams engaging in shareholder friendly activity.”

Forgetaboutit.

And we are SO not done yet. Here’s what’s been announced just since the year began (Factset again):

Going forward, several companies in the S&P 500 have authorized new programs or additions of $1 billion or more since December 31st, including Gap (GPS), Blackrock (BLK), Marathon Petroleum (MPC), L-3 Communications (LLL), Visa (V), Allstate (ALL), Moody’s (MCO), CBS Corporation (CBS), Dow Chemical (DOW), and AbbVie (ABBV). In addition, even larger authorizations were made by United Technologies Corp. (UTX), 3M Co. (MMM), and Lowe’s (LOW), which all announced replacement programs worth approximately $5.4 billion, $7.5 billion, and $5 billion, and Hess Corporation (HES), which announced a $4 billion buyback program on March 4th. Finally, a number of banks were approved to buy back large amounts of common and preferred shares in 2013. JPMorgan Chase (JPM) which was approved for $6 billion in share repurchases, Bank of America (BAC) was approved for $5 billion in share repurchases plus $5.5 billion in redemption of preferred shares, and Bank of New York Mellon (BK), U.S. Bancorp (USB), State Street Corp (STT), and American Express (AXP) were also approved to repurchase greater than $1 billion worth of shares.

Clearly, the name of the game is enrichment for the wealthiest households and corporate executives because all of this will someday trickle-down like hard rain – mani-pedis, Michael Kors shopping sprees, Tesla Model S waiting lists, Barney’s binges etc. This is so hip hop, the one percent is making it rain on the 3 percent and Diddy’s in the hot tup spraying champagne in his own face while the camera lingers in slo-mo.

If you’re wondering how the stock market can chug ahead at a 15% annualized clip while the economy stagnates, wonder no more.

Welcome to the New R&D.

Let’s see to what despicably speculative lengths we can take this new craze…