What do ExxonMobil, Microsoft, IBM, Cisco Systems, Procter & Gamble, Hewlett-Packard, Walmart, Intel, Pfizer and General Electric have in common? A recent Harvard Business Review article by William Lazonick (“Profits without Prosperity”) identified these companies as being the greatest stock repurchasers for the 10-year period 2003 to 2012, with ExxonMobil leading the way at $207 billion. When considering the $80 billion of dividends paid and net income of $347 billion earned during this period, ExxonMobil returned 83 percent of its income to shareholders.

While this seems high, of these 10 companies, ExxonMobil was one of only three (along with Walmart and General Electric) to return less than all of their net income to shareholders through dividends and repurchases. Hewlett-Packard, whose recent problems have been well-chronicled, actually returned $73 billion to its shareholders while earning “only” $41 billion of net income!

Any discussion of the merits of share repurchases and dividends should consider alternative uses of the funds. For a number of years, Apple did not repurchase its shares or pay dividends, deciding instead to invest the funds in research and development and create new products. In 2012, after deciding to pay dividends and repurchase shares, Apple’s stock experienced difficulties, with some citing the company”™s failure to develop new products and technologies. Activist investor Carl Icahn recently withdrew his proposal for Apple to repurchase an additional $50 billion of its stock after receiving a “no” recommendation from proxy advisor Institutional Shareholder Services.

While large dividends and repurchases provide capital to shareholders, they may have unforeseen adverse consequences. An example cited by “Profits without Prosperity” was Intel executives’ lobbying efforts for the U.S. government to increasing spending on nanotechnology research in the mid-2000s.

Interestingly, from 2001 to 2013, Intel’s stock buybacks were almost four times the budget of the National Nanotechnology Institute. This raises the question about what is more important: returning capital to shareholders or investing in technological and business advances? One group of companies feels that short-term returns to shareholders are more important than building long-term value.

Categories: Deanspeak

This was the question posed in a recent editorial in The Wall Street Journal commenting on United States tax policy.Within the past month, Medtronic agreed to acquire a rival medical-device manufacturer (Covidien) for $42.9 billion. Pfizer’s offer of $119 billion to acquire biopharmaceutical company AstraZeneca was rejected. These large transactions raise the normal questions about the purpose of an acquisition, which can include filling gaps in product or service offerings, exploiting operating synergies and bringing products and services into new markets. Now, it appears a fourth incentive for an acquisition has emerged: establishing legal residencies overseas in an effort to reduce taxes.

These inversions (situations where an acquiring company assumes the legal domicile of the acquired company) provide two potential tax benefits. First, the United States corporate rate of 35% is among the highest in the world, and there is little optimism that Congress will reduce this rate in the near future. Second, U.S. tax laws assess an additional tax on profits earned outside of the United States that are returned for use in the United States. Several companies with large cash balances (most notably, Apple) have issued debt to fund dividends and stock repurchases rather than pay the additional taxes on foreign profits.

Consider the case of Medtronic, which earned $4.2 billion prior to taxes in 2013. Using a U.S. tax rate of 40% (35% corporate rate and state and local taxes), the tax bill would be $1.7 billion. Based on Covidien’s Ireland domicile and 12.5% corporate tax rate, the taxes on this would be $525 million, a savings of almost $1.2 billion. The average European Union rate of 21% or average Asia rate of 22% are almost one-half of the U.S. rates. The answer is simple: The United States needs to engage in serious corporate tax reform to be competitive with the rest of the world or watch companies, jobs and investments move to more tax-friendly havens.

Categories: Deanspeak

With the recent release of the Bloomberg Businessweek undergraduate program rankings, this year’s ranking season is complete. I am pleased to report that Mays Business School achieved an all-time best ranking of 29th overall and 9th among public institutions.

Categories: Deanspeak

2014 has gotten off to a wild beginning…for the stock market. Despite hitting an all-time high closing value on January 15, the S&P 500 declined by 3.5% during the month of January (although it recovered to eclipse its all-time high on February 27).

Categories: Deanspeak

Every fall, a great deal of attention is given to universities competing against one another. Events are contested across the United States and rankings are released after each week’s competition. Of course, I am talking about NCAA football games and Bowl Championship Series Rankings. However, the competition is just as fierce in the business school world.

Categories: Deanspeak

On September 11, Twitter announced (through a tweet, naturally) it is considering an initial public offering. This announcement recalled memories of Facebook’s recent IPO, along with similar questions. Is this the beginning of another tech bubble? How does the market value social media enterprises? What impact will public company status have on an entrepreneurial venture? Will the demand for shares create a frenzy that causes technical market glitches on the first day of trading? However, one additional question will be raised that Facebook did not face: How profitable is Twitter?

Categories: Deanspeak

In the past year, there have been few topics discussed more frequently at universities than the emergence of Massive Open Online Courses (MOOCs). MOOCs are online courses aimed at large-scale interactive participation and open access via the web. In addition to traditional course materials such as videos, readings and problem sets, MOOCs provide interactive user forums for students, professors and teaching assistants.

Categories: Deanspeak

In late spring, corporate shareholders’ meetings and votes begin to dominate the business world. This year, the issue of separating the Chairman and CEO roles has received increased scrutiny because of a highly-publicized vote at J.P. Morgan over the fate of its Chairman/CEO, Jamie Dimon. Often, these proposals and the resulting votes reflect shareholder dissatisfaction (in this case, over the infamous “London Whale” trading scandal) rather than issues related to performance of the incumbent or a desire for good governance practice.

Categories: Deanspeak

During the first quarter of 2013, stock prices surged and cash balances continue to increase. On the face, corporations are looking healthier than they have in a long time. Given these dynamics, it would appear to be a good time for corporations to use their cash to retire debt, increase capital expenditures, create employment opportunities, or provide a return to their shareholders. However, the U.S. tax laws discourage this activity through a process known as repatriation.

Categories: Deanspeak

At the end of 2012, many investors received an unexpected gift…special dividends paid by companies in anticipation of changes in the income tax laws. Because of the so-called “dividend cliff”, 483 companies paid a new or increased dividend on a “one-time” basis or paid their 2013 dividends earlier than planned (prior to December 31, 2012). This is the highest number of special dividends paid since 1955 and almost four times the number paid in 2011.

Categories: Deanspeak