September 7, 2006

HAD ENOUGH? (via John Resnick):

Profits Grow At Double-digit Pace, But A Slowing's In The Cards (Rex Nutting, 8/30/06, Dow Jones)

Corporate profits before taxes rose at an annual rate of 13.2% in the second quarter, the 14th quarter of double-digit growth in the 19 quarters since the 2001 recession, according to Commerce Department data released Wednesday.

"Results were good but not spectacular," said Michael Moran, chief economist for Daiwa Securities America.

Profits had increased at a 60.1% annual pace in the first quarter and 46.7% in the fourth quarter of 2005. Profits are up 20.5% in the past year, the government said.

"Profits continue to grow at a pace above average for this phase of the business cycle," said John Silvia, chief economist for Wachovia. "Our outlook, however, is for profit growth to slow for the rest of the year."

Profits accounted for 13.8% of national income in the second quarter, the highest share since the 14.6% share seen in the fourth quarter of 1950. Profits totaled $1.62 trillion on an annualized basis in the second quarter, more than double the $793 billion earned as the recovery got under way in 2001.

Posted by Orrin Judd at September 7, 2006 5:47 PM

What I'd like to learn is, what's happening with corporate cash flow?
My feeling, it's a much more robust growth rate than EBT.

Posted by: Mike Daley at September 7, 2006 6:31 PM

But the country is heading the wrong direction, we must vote the Democrats to power and change course, back to the good old days of the Clinton years when we were heading off to recession.

Posted by: ic at September 7, 2006 6:53 PM

Mike: I'd bet you're right.

See also: Monday, August 28, 2006 — Stock Buybacks Stock buybacks involving the companies in the S&P 500 surged 43% year-over-year in the second quarter and were 175% higher than in the second quarter of 2004, according to Standard & Poor's. Companies spent a record $116 billion on buybacks in the second quarter – eclipsing the previous high of $104.3 billion spent in the fourth quarter of 2005. The total spent on buybacks over the last seven quarters was $630 billion. S&P reported that over 40% of companies reduced their share count in the second quarter. Tech companies were the most aggressive accounting for 25% of buybacks. Companies are now spending as much on buybacks as they are on capital expenditures.

Posted by: John Resnick at September 7, 2006 7:34 PM

Stock buybacks are not a positive sign. Rather, they represent a company throwing in the towel and saying "Heck, we don't know what to do with all this capital. We certainly can't grow the business. So hey, let's retrench and see who salutes it!".

Supposedly, the reduction in the share base results in a proportionate increase in share price, but the underlying fundamentals are such that that never seems to actually be the case.

Posted by: HT at September 8, 2006 12:12 AM

HT: OK, so...public companies have no idea what their stock is actually worth. It's all random. And since never is a long, long time, there's not a single company in the history of stock buybacks that has ever become more profitable, successful or seen it's stock price increase. Yeah, that seems likely.

Posted by: John Resnick at September 8, 2006 12:48 AM

Confident companies pay dividends. Buying stock with shareholders cash is, generally speaking, an effort to push up the price in the near term.Capital investment and dividends are usually a better use of funds. Think of the past abuse of stock option grants. Obscene, short term self-interest.

Posted by: Tom C.,Stamford,Ct. at September 8, 2006 10:54 AM

Stock buybacks are a reasonable use for excess earnings if management doesn't see profitable reinvestment at the time and the stock price is a low multiple of earnings. In fact, buybacks are a signal to me that management would rather relinquish the money rather than embark on some empire building. Dividends, unfortunately, suffer from the double taxation penalty.

Posted by: todd at September 11, 2006 3:05 AM