Little Investment, Lots of Speculation

This article from BusinessWeek illustrates an important feature of capitalism as it is practiced in the United States. While frenzied speculators are pumping cash into financial speculation, business is being very frugal with its real investments. So we have a low tolerance for risk in investment, financial coupled with a voracious appetite for risk in finance. These divergent attitudes toward risk cannot continue forever. Sooner or later these two tendencies are going to collide.

Palmeri, Christopher. 2007. “Pumping Cash, Not Oil: Exxon’s Risk-Averse Stock-Buyback Strategy Is The New Profit Model.” Business Week (28 May).

“Last year, Exxon pumped out $49 billion in operating cash flow on sales of $365 billion. It’s the world’s most profitable company, but Exxon is plowing a smaller percentage of its spare cash back into the business. Although capital expenditures have risen from $11 billion at the start of the decade to nearly $20 billion, that spending amounts to roughly 40% of cash flow, down from 50% in 2000. Meanwhile, overall production has barely budged since its megamerger in 1999.”

“Exxon spent 60%, or $29 billion, of its cash flow on repurchases in 2006, more than any other company in the Standard & Poor’s 500-stock index and a tenfold increase since 2000. The company has retired 16% of shares in the past five years, adding an estimated 88 cents to earnings of $6.68 per share. With Exxon’s stock handily beating the market and peers with a 15% annual return over the past decade, others in the oil patch are catching on to the strategy. “They don’t need to grow production in order to generate shareholder returns,” says energy consultant Richard Gordon.”

“Exxon employs 82,000 people, 10,000 fewer than in 2002.”

“Currently, Exxon pumps out 4.4 million barrels of oil and natural gas a day, roughly the same as its output seven years ago. The company’s production of gasoline, jet fuel, and other refined products is 5.7 million barrels a day, modestly higher than 2000. Exxon says it has added 130,000 barrels of capacity but also divested plants to improve profitability.”

“Exxon has proved that buybacks enhance earnings nicely. And management doesn’t seem to be easing up. In the first quarter, Exxon repurchased $7.8 billion worth of stock.”

“Exxon is not alone. Chevron, which also says it plans to increase production, bought back some $4.5 billion of its stock in 2006, vs. $2.6 billion the prior year. Overall, the industry spent $52.4 billion on buybacks last year, nearly double the amount in 2005.”

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