Flow of funds: Non farm, Non financial, Corporate Business Q2 2004

Long-term investors in equities continued to be disadvantaged by corporate executives who favored stock buybacks over cash dividends.

If it were not for the practice of distributing earnings as buybacks, instead of as dividends, dividends could have been increased by 176% which would have been greatly to the advantage of long-term investors, rather than speculators, fund managers, stockbrokers, and hired professional executives.

However, this would not benefit corporate executives seeking to justify remuneration based on market prices rather than intrinsic value, nor fund managers dependent upon year-to-year total returns, much of which consists of paper profits.

Most long-term equity investors, shielded from reality by multiple fiduciaries and tax deferred retirement plans, continued to believe the Common Stock Legend.

The record level of buybacks in the second quarter of 2004, although straining limits determined by corporate profits, were no longer sufficient to significantly move stock prices upwards; foreign issuers were now selling stocks into an over-priced market at an exceptional pace, neutralizing the buying pressures of domestic corporations.

(See Table F.213 Corporate Equities, Equity Risk (PE), and Buybacks and Options).

Dividends were 55.5% of before tax profits, compared to 59.1% in the year 2000. Stock buybacks were 31.7% of before tax profits, compared to 26.0% in the year 2000. Stock buybacks plus dividends were 87.2% of before tax profits, compared to 75.1% in the year 2000.

The primary source of funds for this sector was after-tax, after-dividends retained earnings, plus current depreciation reserves and inventory adjustments (reported in the flow of funds accounts as ‘total internal funds + IVA’). This total was $1,013.5 billion (about 85% of the similar figure from all non financial business).

Other major sources of funds were trade payables ($169.0 billion, net), mortgages ($107.3 billion, net), and other liabilities. The primary uses of funds were fixed investments ($846.2 billion, net), investment abroad ($195.8 billion, net), and trade receivables ($179.9 billion, net).

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