In Lexington, Kentucky there sits a printer manufacturer called Lexmark, spun off from IBM a number of years ago, that has done a quality job competing against industry powerhouse HP.
However, the company, like so many others, has spent a fortune buying back its shares over the last bunch of years. Lexmark has ponied up over $3.0 billion on share purchases as its stock collapsed to USD $32 in recent trading after peaking at $92 in 2004. This means it lost and wasted a lot of money.
No matter how you slice it, even with the most optimistic bend, the repurchase was a disaster. With over 13,000 employees, if the money was divvied evenly, employees could have walked away with over $230,000 a piece.
That’s not chump change! How many employees do you think would have preferred the cash versus stock options? I think a lot.
Let’s put that into some perspective. Tuition at the University of Kentucky, its home state, is about $17,000, per year. A family with three kids, assuming no tuition increases (very unlikely), would cost $204,000 for four-year degrees. That cash could have been used to finance their kids’ educations.
Instead, where did that family of three find the money? Where else! The equity in their home.
This is a massive swing in a family’s household net worth. Rather than having cash-in-hand to pay for their children’s education, they were forced to borrow. There is likely no data that follows this trend: how consumers would have been better off if corporations spent that money paying their employees instead of buying back shares.
Most major consumer purchases in the early and middle part of this decade were financed with borrowings, rather than higher incomes. Now demand is dead and consumers are stuck with too much debt and public corporations wonder why revenue is stagnant.
Want to see the US economy take off? Have Congress pass a law outlawing share repurchases. This would give labor more power to demand higher wages, versus the false hope that stock options would some day make up for lower wages today – higher wages; more demand.
By the way, Lexmark is one example of hundreds. Returning capital to shareholders via share buybacks has created no return for shareholders. It is time to listen to the market which is telling us that this strategy does not work.
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