An intriguing feature of the post-pandemic situation has been the cash-flow problems faced by several profitable companies which till very recently were generating large cash-surpluses. Companies have used cash surpluses and low interest rates to borrow heavily and use the proceeds from both to buyback shares, thereby keeping shareholders happy and also boosting stock performance based executive compensation.
A NYT article points to a stark reality,
The result was that companies often didn’t have much spare cash, leaving them even more exposed to economic downturns. “They should have built up some buffers against such sudden shocks and risk,” said Willi Semmler, an economics professor at the New School for Social Research in New York. In the three years through 2019, spurred on by Mr. Trump’s tax cuts, companies in the S&P 500 stock index spent $2 trillion on buybacks, 30 percent more than what they spent over the previous three years, according to an analysis of data from CapitalIQ. Including dividend payments, S&P 500 companies spent $3.5 trillion in the most recent three years — an amount that was equal to their net income for the period. Regulatory requirements prescribe how much cash banks and insurers need to hold, but there are few such rules for other companies. They spend their cash as they see fit — on acquisitions, capital expenditures, payroll and, of course, buybacks and dividends. The more money a company spends buying back its shares, the less it has for other uses, making the practice controversial... Over all, S&P 500 companies now have a smaller cash buffer to support their borrowing than they did nine years ago, according to one widely used measure: net debt to EBITDA, which stands for earnings before interest, taxes, depreciation and amortization. The higher the ratio, the less cash the company has on hand and coming in to pay its debts. It was 1.8 as of March 30, according to FactSet, significantly higher than it was a year before the 2008 financial crisis.
Some of the companies struggling for survival now have all run down their cash reserves by undertaking large share buybacks,
Zion Research, which analyzes stocks for investors, recently ranked companies that pushed their stock buybacks to a point where any financial weakness might limit their ability to continue those programs. American Airlines and Boeing — both in line for taxpayer bailouts — were at the top... In the past five years, American Airlines spent $13 billion on stock buybacks and dividends, and Boeing nearly $53 billion. American could receive as much as $10.6 billion in grants and loans from the Treasury. The stimulus bill that Congress passed last month provides as much as $17 billion for companies considered crucial to national security, a category dominated by Boeing...
During the five years that ended in 2019, McDonald’s and Yum Brands, which operates KFC and Taco Bell, made payments to shareholders that were equivalent to a third of the $145 billion in pandemic relief that the industry requested... The industry did not secure the money it sought, but individual restaurant owners are expected to get funds from government programs. Well before the pandemic, Yum repeatedly flagged the mass spread of diseases as a top “risk factor” in its annual reports, warning over a year ago that such outbreaks could “severely disrupt” operations and harm its business and finances. Yum also returned cash to its shareholders, paying $15 billion to investors in buybacks and dividends over the past five years. And it didn’t just spend profits to make the payments; it borrowed to finance them. At the end of last year, Yum’s debt was more than twice the size of its assets, according to Hindenburg — a huge leap from 40 percent of assets five years earlier. During the same period, the compensation of Greg Creed, its recently retired chief executive, totaled $66 million.
The case for regulatory minimum cash reserves for businesses starts to become compelling? Similarly, it should be mandated that any dividends and share buybacks should be necessarily permitted only after all pension and other liabilities have been fully provisioned.
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