This is an update to my January article As GE Goes So Goes The Nation. As I mentioned I don’t normally write about individual companies, but GE is the poster child for the age of wealth extraction.
Wealth extraction occurs during the boom phase of the markets, not the bust. The bust phase is when those who got extracted during the boom find out about it. Then they misinterpret the cause because of the timing and the help of wall street and politicians who all have “solutions” which tend to deepen the current crisis and setup the next crisis.
Let’s keep this simple:
GE from 2014 – 2016:
- $35 Billion Underfunded Pension
- $46 Billion burned on Stock Buybacks to “add value”
- Stock price advances 15% to a high of $32 in 2016 during buybacks
- CEO retires with huge protected pension & big paycheck for adding so much value
GE from 2016 – 2018:
- Buybacks end, pension still not funded
- Stock price collapses 70% to $10/share (30 October 2018)
- “Needs to raise $30 billion in cash” to avoid severe downgrade
- Can barely meet current dividends – “needs to cut dividends again”
- $35 billion underfunded pensions for half a million long time employees
- GE is being dismantled to generate cash
Did you see the wealth extraction? It occurred during the boom. It was not just the $46 billion in stock buybacks, but that was the most blatant. There were other engineering tricks on the books that came to light recently.
GE is not alone. We see this across a large swath of US companies. And more worrisome globally but in different forms. GE’s core non-financial businesses are doing fine, it is the financialization of the company over a long time that is catching up to it.
The current US economy numbers look fine too, it is the financialization of the economy that will catch up to the markets soon. When? When the record buybacks (thanks to the tax plan) peter out and companies are left with immense debt in a rising interest rate world. Maybe sooner. We’re watching for the signs in risk-sensitive investors jumping ship.
Please don’t be like those long-term GE investors who held tight to their GE stock for the dividends because they were only cut three times in the companies 120 year history.
[30 October 2018 Update: GE just cut their dividend to 1 cent per share]
I would like to point out the utter silence coming from Washington and Wall Street on what stock buybacks are doing to the corporate balance sheet and their ability to weather the smallest of storms. The credit agencies are talking about it, but no one will care until the damage is done.
With record buybacks this year, the SP500 is probably somewhere where GE was in 2016 or 2017. The point of this post is not to scare you into selling today, but to understand we are closing in on the endgame of another episode of wealth extraction. Don’t be extracted.
The Wall Street Journal explains how Insiders Pocket Gains on Buybacks, Vexing Regulator.
Corporate insiders are personally capitalizing on the recent boom in buyback announcements, vexing a top regulatory official.
Taking advantage of price bumps that often accompany share-repurchase announcements, company executives have been selling significantly more of their stock immediately after the news than they do beforehand, according to an analysis by Robert J. Jackson, Jr. , a commissioner at the Securities and Exchange Commission.
“The SEC gives an exemption from market-manipulation rules to companies doing a buyback,” Mr. Jackson said in an interview. “The SEC shouldn’t be making it easier for executives to use them to cash out.”
I think “market-manipulation” for personal gain is a pretty good way to explain why balance-sheet-destroying buybacks are favored over investing in future production that won’t compensate the current CEO.
In other words, the market is being extracted today and those who hold too long will pay.
For more on the GE story you can read As GE Goes So Goes The Nation.
Invest safe, invest smart.
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