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Erik Paulsen Congratulates You On Your 401K - But Hold On...

Category: Economy
Posted: 04/20/18 16:32

by Dave Mindeman

A tweet from Erik Paulsen:


Have a 401(k)? #TaxReform is working for you. Learn how stock buybacks are good news for the more than 50% of American households that own stock:

Then he linked this site: Buybacks are Great for Working Americans

The reasoning....

Workers benefit when stock values rise. Stock buybacks increase the value of retirement accounts and personal equity holdings. If investors continue holding stock instead of selling it back to the company in a buyback, its value will increase because there are fewer shares in circulation. Higher stock values increase the funds in retirement accounts, boosting workers' retirement income.

Another line of reasoning is that stocks permeate retirement plans.

"First, investing isn't just for the wealthy. Over half of American households own stock, either directly or indirectly. In fact, worker retirement accounts (company pension plans, 401(k)s, IRAs, etc.) hold 37 percent of all U.S. corporate stock."

OK - that may be true, but does it really benefit the American worker and middle class that much?

Color me skeptical. Even though 37% sits in retirement accounts that still leaves the overwhelming majority sitting in hedge funds, corporate buybacks, and wealthy individual players.

With a 401(K), you can have some limited control over what happens to the stock but most of it is in mutual funds, which means some Wall Streeter is managing your money. And they are not going to have the same profit incentive to make that money work as they would for a wealthy client who expects big returns. More often than not, your money manager will use a safe slow growth mutual fund with limited risk and unable to take advantage of market swings. Which is good safe management, but not something that will benefit greatly in the current environment.

So let's talk about those buy backs. Why do corporations buy their own stock back. Well, it turns out (surprise), it is mostly for selfish reasons.

1. Dividends. For a company dividends are a means of giving stock value but it is also a "cost of equity" - meaning they want to give dividends as a reward for shareholders, but if they have fewer shares to pay dividends on, they can keep the excess money.

2. Preserving the Dividend. When a company has to cut back on its dividend, the share price will usually take a big hit. If the company buys back its shares in lieu of a potential dividend reduction later, the share price can be maintained with that reduced "cost of equity". The shares bought back can then be reissued later with the potential for making a profit.

3. Undervalued Stock. Companies will buy back shares at times they think their stock price is not reflecting its worth. Share buybacks can often be reissued at a higher price when the stock comes closer to its value. The company gains the profit.

4. Earning Per Share. Buying back stock makes the stock more attractive because fewer shares in the marketplace automatically increases the earnings per share value. Profits can be the same but when extrapolated over fewer shares, the EPS looks great to investors. Also, by buying back shares, it can also be viewed by the market that management has enough confidence in the company to reinvest in itself.


So, as you look at those advantages, 401K's get a bit of a boost, but just like everything else involving this tax cut, the big money is made by the Wall Street players and their wealthy clients. Corporations aren't doing this for your benefit, they are doing it first and foremost for themselves.

When Erik Paulsen congratulates you on your 401K value, he is not telling you the whole story.

He never does.
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