S&P 500 lacks of insiration and talent to create value

Earlier this year I suggested that so-called most of the Companies are not ran in shareholders’ interest.

It took some time to do the actual facts digging, but here they are:

Out of S&P 500 index 449 companies used 54% of their profits ….to buy back their own stock, this represents $2.4 trillion dollars. Dividends payouts consumed another 37% of the earnings.  This was happening last ten years from 2003 through 2012 and continues today.

There is three main reasons for it:

- -   One of the main metrics CEOs are being rewarded based on so called total shareholder return. It combines share price appreciation and dividends paid to show the total return to the shareholder expressed as an annualized percentage. It is calculated by the growth in capital from purchasing a share in the company assuming that the dividends are reinvested each time they are paid.

         This means that they are inevitably driven to push shares prices at all cost.  Average  CEO salary in S&P 500 index is $30.3 million each in 2012, 42% compensation comes from stock options.

-   -    In Western Europe some countries actually establish minimum returns on pension funds, meaning that the companies have to achieve it, or their shares will be unloaded.

-  -     Lack of vision and talent to invest back home. Obviously, the leaders are run out of profitable investment opportunities. One of the chief functions of top executives is to discover new opportunities.  Buying the socks back begs the question whether the CEOs are doing their job.  For example, the only money that Apple ever raised from public shareholders was $97 million at its IPO in 1980.

	ExxonMobil	Microsoft	IBM	Cisco systems	Procter & Gamble	Hewlett-Packard	Walmart	Intel	Pfizer
Net income	$347 B	$148 B	$117 B	$64 B	$93 B	$41 B	$ 134 B	$79 B	$84 B
Repurchases	$207 B	$114 B	$107B	$75 B	$ 66 B	$64 B	$ 62 B	% 60 B	$59 B
Dividends	$80 B	$ 71 B	$23 B	$2 B	$ 42 B	$9 B	$ 35 B	$ 27 B	$63 B
Total	$ 287 B	$ 185 B	$ 130 B	$ 77 B	$ 108 B	$ 73 B	$ 97 B	$87 B	$122 B
CEO pay	$299 B	$ 12 M	$247 M	$297 M	$ 90 M	$ 210 M	$ 189 M	$ 127 M	$91 M
% Stock based	73% $211 M	0%*	64% $158 M	92% $273 M	16% $14 M	37% $78 M	62% $117 M	62% $79 M	25% $23 M

Steve Ballmer owned 4% Microsoft, valued at $13 billion

Curious facts:

-         Intel lobbied U.S. government to increase spending on nanotechnology. Once it was done, Intel’s expenditures on buybacks were almost four times the total budget allocated by U.S. government to boost nanotechnology development.

-         Drugs in the USA are at least twice more expensive than in any another country.  It has been long argued that the prices are required to permit more R&D to be done in the USA than elsewhere.  Yet from  2003 to 2012 Pfizer channeled an amount equal to 71% of its profits into buybacks.

According to Thomas Piketty 0.1% richest U.S. households collected a record 12.3% of all income in the country in 2007, surpassing their 11.5% share in 1928 on the eve of the Great Depression. In 2012 its rebounded hitting 11.3% again.