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Bottom line: Profits help investors

Brian Kilb discusses what corporations have been doing with their record levels of profits and how their choices might affect investors now – and in the future. He shares his insights in a Money Talk Video with Joel Dresang.

Joel Dresang: Brian, we talk a lot about corporate earnings and interest rates. We know that corporate earnings are actually at record heights. Let’s talk a little bit about why that is, what the corporations are doing with those profits, and what that means to shareholders.

Brian Kilb: In the recovery, Joel, corporate America has just been on a run, and margins are at their highest levels – not just aggregate corporate profit but amount of money per unit of sale.  It’s the all-time high.

That’s important I think, when we come back to the conversation later about what we’re going to do with those profits as to where the money’s going.

First of all corporate buybacks – or the repurchasing of one’s own shares – are at record highs, on pace to beat the record in 2007.

It’s a message from the company itself that one of the best investments out there is their own company.

Joel: What about dividends? I’m also seeing that dividends are really high now.

Brian: Dividends are also trending toward record levels. So here’s another example of where we’re rewarding shareholders. Now, you’re receiving real money for staying the course.

Joel: And I’m also wondering how this is affecting balance sheets of corporations?

Brian: Post-financial crisis, we’ve all been about cleaning up our bad habits of the past. Corporate America has done its part by making their balance sheets healthy, as well.

In 2007, debt-to-equity ratios were around 220%. That percentage at the end of 2013 was 104%. So, you’ve gone from $2 of debt to a $1 of equity to $1 of debt, $1 of equity. Corporate America is in significantly better health.

Joel: How does that help shareholders if the balance sheets are healthier?

Brian: We’re setting the stage for generating expanded sales internally. We haven’t done a lot of reinvesting in research and development. We haven’t done a lot of reinvesting in the acquisition of capital equipment. We haven’t done a lot of reinvestment in trying to find those new sales at top-line growth. And I think that’s where a lot of the money will be used in the future.

Joel: Mergers and acquisitions, is that something that necessarily benefits shareholders?

Brian: Mergers and acquisitions are up 39% so far this year. I don’t take it for granted that acquisitions are good, but I think good acquisitions – where there are corporate synergies, where the economics make sense – can be useful for shareholders.

Joel: So, profits are good for shareholders generally, but there are different ways that corporations can use those profits to benefit differently.

Brian: Exactly. And I think it’s important to remember that we’ve made substantial use of those profits to date in certain areas: buybacks, dividends, improving the health of the balance sheet of the company.

But we have many opportunities yet to deploy those assets in useful ways to create new products, new opportunities for sales that will enhance revenues and give us that top-line growth that we really haven’t experienced significantly so far.

Joel Dresang is vice president-communications at Landaas & Company.

Brian Kilb is executive vice president and chief operating officer of Landaas & Company.

Money Talk Video by Peter May 
(initially posted Oct. 23, 2014)

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