We've visited one of the co-authors, Professor William Lazonick, a few times. Some of his ideas about fstock buybacks make my confreres choke mid-bite of their yummy filets. A couple links after the jump.
From the Institute for New Economic Thinking, December 18, 2023:
Reindustrialization vs Financialization
GM’s $10-billion roadblock
The UAW strike against GM, which began on September 14, concluded six weeks later with UAW workers securing a long overdue boost to their wages and benefits that were cut prior to and during GM’s bankruptcy in 2009. Importantly, the UAW won the right to extend its master agreement to UAW members employed in GM’s EV battery production.
During the negotiations, GM’s CEO Mary Barra warned that the financial damage caused by the strike would threaten the company’s ability to invest in its EV transition, telling workers: “make no mistake: If we don’t continue to invest, we will lose ground, and it will happen fast … Nobody wins in a strike.”
In 2021, GM had announced an increase to $35 billion in projected costs for its EV transition from 2020 to 2025. Since 2018, when the company began to execute the transition, through Q3 2023, GM raked in $57.2 billion in net income, a large proportion of which comes from sales of its gas-guzzling, high-margin trucks, SUVs, and crossover vehicles. The profits from GM’s internal combustion engine (ICE) vehicles could be committed to funding the company’s EV transition. Instead, GM has been using its cash flow to give multibillion-dollar manipulative boosts to its stock price.
Notwithstanding Barra’s warning to GM’s workers about jeopardizing the EV transition, on November 29, the company announced that it was doing a $10-billion stock buyback in the form of an accelerated share repurchase (ASR). Given the market price of GM’s stock on November 29, the $10-billion ASR is equal to about 25% of the company’s shares outstanding.
An ASR differs from an ordinary stock buyback program by enabling the company to reduce shares outstanding by the full value of the authorized buybacks (in this case, $10 billion) on the date of the announcement. In contrast, an ordinary stock buyback program entails open market repurchases carried out periodically at management’s discretion over the life of the program. An ASR, therefore, gives an “accelerated” boost to earnings per share.
This ASR is in addition to the $4.9 billion in open-market repurchases that GM has carried out under ordinary buyback programs since 2022. Moreover, under GM’s existing repurchase authorization, Barra and her CFO Paul Jacobson can execute another $1.4 billion in open-market repurchases at their discretion. GM also announced a 33% increase in its dividends per share.
These massive distributions to shareholders raise questions about GM’s commitment to an EV transition. In January 2021, GM had stated its intention to produce only zero-emission battery EVs by 2035, echoing China’s announcement in late 2020 of a similar policy objective. In 2020, GM sold 2.9 million vehicles in China out of a worldwide total of 6.8 million.
In an interview on CNBC’s Squawk on the Street on the day of the $10-billion ASR announcement, Barra was asked about the prudence of this huge distribution to shareholders, given GM’s recent problems with its autonomous EV division Cruise as well as its declining market share in China, the nation that has surged to global leadership in the EV transition.
Barra was dismissive and vague, saying,
as we got through some of the elements of the year that were driving a lot of uncertainty, once we had that certainty, we were able to make this decision and get to a price or get to a place from a cash balance perspective that is more what we have said we want to have going forward, so this was really a reflection of our capital allocation framework. You know, when you look at the last few years, there’s been a lot of uncertainty, whether it’s the pandemic, semiconductor, labor, those are past us.Over the past two decades, China has become a key market for GM. The company’s unit sales in China peaked at approximately 4 million vehicles in 2017 before declining 43% to 2.3 million in 2022. Of the GM cars sold in China in 2022, about 1.3 million were low-priced vehicles made by SAIC-GM-Wuling Automobile. GM’s sales of Chevrolets, Buicks, and Cadillacs in China dropped dramatically from about 1.9 million in 2017 to 1.0 million in 2022. The vast majority were ICE vehicles, which, given China and GM’s stated 2035 goal, will become increasingly irrelevant as the EV transition proceeds.
When questioned by CNBC about GM’s deteriorating market share in China, Barra recognized that Western companies like GM are being challenged by indigenous Chinese companies: “With this shift to electrification, there’s been a reset there. When you have a hundred new entrants coming into a market, there’s going to be a shift.”
Is GM committed to the EV transition?
CEO Barra acknowledges that GM’s EV transition has experienced “short-term bumps in the road”. By allocating GM’s cash to massive stock buybacks, however, GM’s investment in the EV transition is taking a backseat to distributions to the company’s shareholders. Meanwhile, formidable new competitors are making the transition happen....
....MUCH MORE, they are just sharpening their knives. They proceed to use them to cut through the crap, and that can save an investor's bankroll.
Previously:
August 2023: Stock Buybacks: "The Scourge of Corporate Financialization: Income Inequity, Employment Instability, Productive Fragility":
Stock buybacks as a mode of predatory value extraction
December 2022: "Share Buybacks and the Contradictions of 'Shareholder Capitalism'” (it's a racket):
I've mentioned SEC Rule 10b-18 a few times, some links after the jump. A lifetime of looking at this stuff has led me to the conclusion that in the U.S. stock buybacks are nothing more than a tax-avoidance scam with the added benefit of rewarding managers for things they didn't do by, well, managing the company rather than the stock price....
(there's an icebreaker for tonight's festivities: "Say, what's your take on SEC Rule 10b-18?")
June 2020: "Managing Decline: The Economy of Value Extraction"
March 2015: " Harvard Business Review Announces "The Best Management Article Of 2014"
Good news: Harvard Business Review has announced that Bill Lazonick is the 2014 HBR McKinsey Award winner for the best HBR article in 2014 for his brilliant, hard-hitting piece, “Profits Without Prosperity” (September 2014 HBR). Lazonick is a professor of economics at the University of Massachusetts Lowell, where he directs the Center for Industrial Competitiveness.Here is Profits Without Prosperity, HBR, September 2014
In the article, Lazonick described the horrifying impact of massive stock buybacks: net disinvestment, loss of shareholder value, crippled capacity to innovate, destruction of jobs, exploitation of workers, runaway executive compensation, windfall gains for activist insiders, rapidly increasing inequality and sustained economic stagnation. Lazonick’s article explained with quantitative detail why buybacks are an economic, social and moral disaster.
The article revealed for instance that share buybacks weren’t done for the most part when stock prices were low: astonishingly, most of the big purchases came when the stock price was high. Why? “Because stock-based instruments make up the majority of executives’ pay, and buybacks drive up short-term stock prices.” These firms are engaged, the article said, in “what is effectively stock-price manipulation.” In September 2014, The Economist called them the “corporate cocaine.”...MORE
