Friday, November 21, 2014

Still Disgorging

From Bloomberg last month:
Companies in the Standard & Poor’s 500 Index really love their shareholders. Maybe too much. They’re poised to spend $914 billion on share buybacks and dividends this year, or about 95 percent of earnings, data compiled by Bloomberg and S&P Dow Jones Indices show. Money returned to stock owners exceeded profits in the first quarter and may again in the third. The proportion of cash flow used for repurchases has almost doubled over the last decade while it’s slipped for capital investments...
This is a familiar theme to readers of this blog.

Here are my own updated numbers. The figure shows dividends and total payouts for the S&P 500 and the nonfinancial corporate sector as a whole, for rolling five-year periods ending in the year shown. Payouts are given as a share of aftertax profits.

Shareholder payouts as a fraction of aftertax profits, 5-year moving averages

Unlike the past versions of this graph I've put up here, which came from the Flow of Funds, this is taken directly from the corporate financial statements compiled in Compustat. Among other things, this means that we can see share buybacks directly, rather than only net share retirement. But the picture is qualitatively similar to what you see in the aggregate data -- after being quite stable at around 50% of after tax profits through the 1970s, payouts doubled to about 100% of aftertax profits during the 1980s, and have remained near that level over the past 25 years.

I haven't broken out the S&P 500 before. (This is based on the current index membership -- it didn't seem worth the trouble to find historical indexes. So for the early years we are talking about a relatively small number of firms.) As you can see, the picture is basically similar. The rise in S&P payouts comes a bit later. And unlike the broader population of firms, there is no rise in dividends relative to profits in the 1980s and 1990s -- the entire increase in payouts comes from buybacks. The other difference -- not immediately evident from the chart -- is that profits, not surprisingly, are more stable in the S&P 500 than in the smaller firms outside the index. You can't tell from the figure, but the big spike in the black lines comes from a collapse in profits in the non-S&P firms, not an increase in payouts. The corporate sector excluding the S&P 500 reported substantial aggregate losses in 2001-2002, meaning a much lower denominator for the ratio in the early 2000s.

Incidentally, this figure was produced in R, which I am finally switching to after years of using SAS and (hangs head in shame) Excel. If you are starting a graduate program in economics -- and I know some readers of this blog are -- I strongly, strongly advise you to learn R and get in the habit of producing all your work in LaTeX with embedded R code, using sweave or knitr. Kieran Healey explains why. You should never cut and paste a graphic from one application to another, or copy statistical results by hand into a table. I think this is the single piece of advice I most wish I'd gotten when I started graduate school.

1 comment:

  1. The nagging nitpicker here again. The link goes to this blog post, not to

    I find this subject very interesting and given that I'm an amateur I wish I knew more.

    "If the financial crisis interrupted the flow of credit only to small, bank-dependent businesses, it can explain at best a small part of the collapse in business investment after 2008."

    There seems to be a debate about this in the econoblogosphere. Some economists are saying that business investment is about where it should be given demand levels. Dean Baker for example. DeLong too seems to say it's average and only residential investment is down. Again I don't know what to think.

    Is the rise in profits and the capital share going to buy-backs?

    Compare the strong shareholder "bargaining power" versus the weak bargaining power of labor.