Laurence D. Fink, CEO of the largest asset management outfit on Earth BlackRock (with $4 trillion, thank you very much), has sent a letter (what, no email?) to the CEOs of the largest 500 U.S. companies, telling them they must stop playing favorites with investors through “shareholder-friendly” gestures like paying dividends and buying back stock, Andrew Ross Sorkin reported in the NY Times.
Fink, arguably the most important stock holder in the universe, says these moves, usually in an attempt to appease activist investors, are helping no one in the long run, because they come at the expense of the organic growth of many companies, stripping them of potential value and boomeranging on stock holders.
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“The effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy, ” Fink wrote his fellow CEOs. in the letter. He believes by gifting investors, these CEOs are actually draining away “innovation, skilled work forces or essential capital expenditures necessary to sustain long-term growth.”
According to Sorkin, American companies spent close to a trillion dollars in 2014 on stock repurchases and dividends, by American companies he means just about every single major American company.
General Electric just last week said it’s buying back $50 billion of its stock, having sold most of GE Capital.
Last year, Apple went with a $90 billion buyback of its own stock.
Also last year: Exxon Mobil spent $13 billion on stock buyback.
IBM has spent $108 billion on buybacks since the year 2000.
Fink argues that those expensive buyback habit “sends a discouraging message about a company’s ability to use its resources wisely and develop a coherent plan to create value over the long term, ” and that “with interest rates approaching zero, returning excessive amounts of capital to investors” is kind of meaningless, seeing as the happy recipients “will enjoy comparatively meager benefits from it in this environment.”
Fink directs part of his righteous, Zeussy ire, at Congress, suggesting that “U.S. tax policy, as it stands, incentivizes short-term behavior. Since when was one year considered a long-term investment? A more effective structure would be to grant long-term treatment only after three years, and then to decrease the tax rate for each year of ownership beyond that, potentially dropping to zero after 10 years.”
A new tax policy, Fink proposes, “would create a profound incentive for more long-term holdings and could be designed to be revenue neutral. In short, tax reform that promotes long-term investment will benefit both the companies who rely on capital markets and the hundreds of millions of people saving for retirement.”
Sorkin suggests Fink’s tirade is a tiny bit self-serving, seeing as his business model at BlackRock, unlike the bulk of finance companies who rely on trading fees, does not require turning over the company’s portfolio, and considering how truly enormous it is, BlackRock is free to hold its investments for years and years.
So that, should the tax rules are adjusted as he suggested, Fink wins. It doesn’t mean Fink is a cynic, necessarily, but it’s good to know.
At a time when folks like Carl Icahn amass billions by insisting companies to return cash to shareholders—they’re the “activists”—it’s nice to see someone in business standing up to them.
Sorking writes that Fink had told him last week an activist shareholder said to him, “You hate me, don’t you?” — to which Fink responded in typical fashion: “No, I don’t hate you, I’m just trying to get some balance.”
Hey, when you’re schlepping $4 trillion on your head, balance is the name of the game.
