“Never
underestimate the ingenuity of corporate America or the optimism of its
citizens. While the media obsess over multiple
economic crisis scenarios and reinforce the message that the economy promises
little growth, corporations just keep on grinding out higher earnings.…
“Pressured
on the top line, corporations have been cutting costs, downsizing and
increasing worker productivity since 2008.
This obviously has its limits and becomes less effective over time, but
greater efficiency is a mind-set that takes year to instill in large
organizations before measurable saving occur.
“Since
markets care more about earnings per share than total earnings, financial
engineering is an effective tool that can work wonders. With interest rates so low, and shrinking
sales requiring less working capital, corporations can borrow cheaply and
leverage their balance sheets to use the increased cash flow to buy back
outstanding shares. Some 20% of all U.S.
corporate stock has thus been bought back since 2005. Another tool is growth through mergers and
acquisitions. Resurgent stock prices and
huge buildups of cash make buying other companies with lower price/earnings
ratios an attractive option. It’s also a
way to use overseas cash for foreign buyouts without first having it taxed in
the U.S. Upwards of $600 billion in
deals so far this year testifies to the popularity of this trend.” [Richard Lehmann, Forbes, June 16]
