Where Oh Where Do The Profits Go? 🤔

Diving into our economy’s growing inequality & the problem with stock buybacks 💲.

On to BYB v6, where we will cover what companies do with their profits and how you can incentivize the ones planning for long-term sustainability. Note: Better Your Bread will be moving to a Wednesday release moving forward.

This past week has been another hard, yet progressive one as we see equality advocates continue to push to change the way our country works. I was especially proud this week to see both my home state of Minnesota’s (where I’m living now) city council pledged to redefine the model of public safety, dismantling the police force, and New York City’s (where I normally live) Governor Cuomo signing a police reform bill to make officers more accountable and criminalize chokeholds among other restraints. These are both incredible steps in the right direction as it is evident there is a need for serious change in our current national policing structure. While we lack a national leader to bring us together right now, it is heartening to see local legislators listening to their communities and effecting the tangible change being demanded.

My company leaders decided to mark this past Friday as an employee day of pause, urging us to reflect on the current movement and the systemic racism that has been ingrained in our culture for hundreds of years. I think the day of pause is largely meaningful and something I encourage all companies to embrace — if not at least giving this Friday off for Juneteenth. I have been thinking a lot about what I can do to support my Black/Brown colleagues and friends, and after all I have done it’s still hard to feel like what I’m doing is helping. It’s a fact that I will never truly understand what black Americans have gone through and go through on a day to day basis. I am ashamed I didn’t have this reaction when the Black Lives Matter movement captured the world’s attention in Ferguson, Missouri after Eric Garner’s death back 2014. There were millions and millions protesting and chanting Black Lives Matter — just that they matter, not are better than, simply MATTER. Why didn’t I join them? Why wasn’t I compelled to take action and donate, research, and support my black colleagues and friends then? I am frustrated that I didn’t do anything about it, that our government and our corporations didn’t do anything about it. Addressing the serious inequality is the first step — something I hope we have all done by now — but looking inward to change your mentality, take action, and be proactive is the critical next step. As I took Friday and the past 4 weeks to donate to a number of different causes, listen to various episodes of Code Switch, and re-read incredible articles by my colleagues, Yusuf & Sarah, I am trying to educate myself and heighten my awareness 🧘 so that I don’t regretfully look back on another time like 2014 wondering why I didn’t take action to understand.

This time ⏱️ in our lives presents an incredible opportunity to change ourselves and change our country. I am committed 100% to try my hardest in changing the way I think, act, and support the underrepresented minorities in this country and the world 🌏. Can we say the same about our companies? This leads us into this week’s topic on why companies need to look inward and invest their profits in creating a more equitable workplace for all races, genders, and religions. Let’s take a look at where company profits have historically been invested over the past 10 years and how they reallocate that money to create a more just corporate America 🤵.

Before we get into some details and since this is an investing blog — I want to really advocate investing once more in the ETF: NACP. As I highlighted last week, NACP is an ETF designed to provide exposure to US companies with strong racial and ethnic diversity policies in place, empowering employees irrespective of their race or nationality. Any management fee you pay goes to support the nonprofit that is the NAACP. If you want to put your money to work in the market while supporting companies who empower their diverse employees, this is a great option ✊🏿✊🏾✊🏽.

As always, I want to link to last week’s post of BYB, which makes the case for allocating your money to companies committed to diversifying their boards of directors, empowering more races and genders to change the way our companies operate. It’s better for America and better for business. Find all my other blog posts here for context. Once again, the goal of the blog is to better your bread and make your money materially important. Feel free to subscribe to the blog via email at the bottom of this post and as always, make sure to shoot me an email anytime with any questions at cmahoney@justcapital.com, connect with me on LinkedIn, reach out on Twitter @iCharlieMahoney, and follow me on Medium (Charlie Mahoney). Beyond happy to help.

Now — to the purpose of a corporation. Milton Friedman famously said 50 years ago “There is one and only one social responsibility of business — to use it resources and engage in activities designed to increase its profits 🤑 so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

Personally, I believe that to be a large part of the problem with our economy. The only responsibility of a business is to increase their profits? What about to take care of their employees, pay their employees living wages, pay their employees equally regardless of race or gender? Let’s not even begin to touch on the environment as it’s clear almost all companies 50 years ago had no regard for environmental impact. Regardless, it is an incredibly short-sighted and short-term approach to business. Another short-sighted approach to business, especially now, is the use of corporate profits for stock buybacks.

What is a stock buyback?

Stock Buybacks occur when a company buys back its shares from the stock market with its profits to limit the supply of stock and increase the stock price. It has become common practice for companies to use their profits to buy back their stock from the market, effectively pumping up the stock price over the short term to incentivize their shareholders and C-suite executives with equity-based payouts. Why is this a problem?

It is a hotly debated topic ♨️. On one hand 🖐️, stock buybacks are incredible for shareholders. If you own stock in Apple, Netflix, Facebook, and Microsoft and they all use a portion of their profits each quarter to buy back their own shares from the stock market, this will send the price of their stock higher and make you more money 📈. In addition — and even more importantly, these rising stock prices are not realized like a dividend would be so there is no need to pay capital gains taxes on those gains. Stock buybacks have fueled the longest bull market (when stock prices are going up 👆) in history from 2009 after the financial crisis to 2020 when COVID-19 hit. Let’s look at what happened over that time period with company profits.

Per the Harvard Business Review, “the 465 companies in the S&P 500 Index in January 2019 that were publicly listed between 2009 and 2018 spent, over that decade, $4.3 trillion on buybacks, equal to 52% of net income, and another $3.3 trillion on dividends, an additional 39% of net income.”

In addition, The Tax Cuts and Jobs Act of 2018 cut the corporate tax rate for corporations to 21% from 35% (a move I support), however, companies used this extra cash 💵 to buy back their own stock and issue dividends.

Doing the math 🧮… that is 91% of the profits across all companies within the S&P 500 over an entire decade that went entirely to shareholders. That is $7.6 trillion dollars in cash. This is extra cash that could have gone to higher employee wages, hiring a more diverse workforce, building more factories, creating more jobs, and investing in innovation.

But it’s great if the stock market keeps going up, right? If you’re wealthy, it’s even better. The top 1% richest Americans own 56% of all stock market value in the United States. The top 10% richest American households in the US own 88% of all invested money in our stock market. Take a look.

With the Coronavirus Pandemic and the civil unrest within our society right now, do you see why this is a problem? The wealth inequality gap only continues to widen. The rich have basically bounced back to their normal levels of wealth as the S&P 500 has only lost -3.28% (as of 6/15), climbing back from being down -34% in late March. While the richest in the United States are lauding the stock market rebound, what’s happening in the stock market relative to the actual economy is increasingly uncorrelated. The poorest in our economy are without jobs. The unemployment rate is now at 13.3% as of May after hitting a historic 14.7% in April. These are the highest levels of unemployment since the great depression, yet the stock market has only lost 3%?

Looking back to the chart above, the stock market is not representative of the American economy anymore. As we’ve seen, corporate cash for the past ten years went into propping up stock prices for the wealthiest investors. Now, many of these companies are asking for bailouts for the government to keep their businesses alive. Just look at the Airline industry ✈️ over the past decade:

You are seeing that chart correctly. 96% of all profits made by airlines from 2010–2019 went to propping up their stock price with share buybacks. The five Airlines — Delta, American Airlines, United, Southwest and Alaska — have spent $44.9 billion dollars on share repurchases and dividends in the last five years. This is money that could have been invested into employee wage hikes which would’ve provided an extra cushion during the downturn or saved as reserve cash for unprecedented times like these. Now as travel volume has decreased by over 90%, American Airlines ✈️ is in talks to go bankrupt with over 129,000 employees. I’m not saying having spare cash on hand would’ve saved the airline given the difficult situation, I’m saying we need to think for the long term. Temporary stock price increases are not the answer. You can build your stock price higher without stock buybacks by investing in your workforce 👩‍🏭, creating local jobs 👨‍💼, producing meaningful products, and acting ethically. This creates a sustainable company that takes care of your employees, customers, and communities — but also your shareholders.

Ultimately, we need to create a better economy for all. We need to think longer term. We need to invest in diverse 👩🏼‍🤝‍👩🏿, equal workforces. We need our companies to invest their profits into all of their stakeholders, not just their wealthy shareholders. The world cannot continue operating in this unjust way if we plan to minimize the inequality gap. That goes for race, gender, and wealth inequality. Reallocating your money to companies who are making strides towards being more ethical and don’t think short term is the future we need.

Lastly, let’s look at our weekly ⚡Shock Stocks⚡.

In the spirit of change, I want to first highlight one company for its demographic disclosure and commitment to equality. Many companies have come out to acknowledge the systemic racism within their organizations but many have taken significant action by committing hundreds of millions of dollars to change. Companies like PayPal have pledged $530 million dollars to Black-owned and minority-owned businesses in the U.S, amongst many others. Find the list here.

👍 Intel Corporation (Ticker: INTC)

• Of the top 1000 biggest companies in the United States last year, just 31 companies disclosed detailed demographic data as part of their EEO-1 Survey; and only one company — Intel — disclosed wage data by demographics.
• This is a major step towards workforce pay equality across all demographics. It is not pretty but the fact that Intel is willing to provide this information to the public is the transparency we need to change from within and allows us to hold our companies accountable.

👎 Caterpillar (Ticker: CAT)

• I don’t find enjoyment in shaming companies but want to highlight Caterpillar because they announced in late March they have suspended operations at two production plants — one in East Peoria, Ill. and another in Lafayette, Ind — along with a foundry in Mapleton, Ill., putting many out of work.
• About two weeks later, the company said it would be giving shareholders $500 million in cash dividends. This is a great example of how to not take care of your workers and focus short-term.

Finally — a friendly reminder the entire point of this blog is to catalyze you to understand what you’re invested in and do your research to ensure your investment portfolio aligns with your beliefs. You can still make money by being morally minded — don't forget that. ✌️

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Disclaimer: I aim to provide accurate information on personal finance and investing, but it may not apply directly to your individual situation. I am not a financial advisor and we recommend you consult with a financial professional before making any serious financial decisions. The content on Better Your Bread is informational and educational purposes, thank you!