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.