Writen by Sam Kovacs
Back in July, Joe Biden shook the markets when he claimed that he would “put an end to the era of shareholder capitalism”.
It now seems that he is elected. Should we be scared?
It seems the market isn’t. After all the S&P 500 (SPY) is up, not down dramatically as many had feared.
Back in July, we published an article titled “How you can retire on dividends forever and ever”.
One of the comments was from a fellow, who stated that “the real danger to this investment thesis is that the Democrat Presidential candies has just stated he will be looking to eliminate ‘shareholder capitalism’ ”.
The comment stayed in the back of my mind for a while. I’ve been pondering the question of stakeholder capitalism, what it is, and what it is not, for a long time. I’ve come to the conclusion, that nobody needs to worry. To quote a WSJ article “in stakeholder capitalism, shareholders are still king”.
In this article I will:
- Make the case that stakeholder capitalism, is in fact, just shareholder capitalism done right.
- Argue that the American model is like no other & that it provides individuals with unparalleled opportunities. There is an upside to inequality
- Our dividends first approach allows you to have a share of the spoils, without having to rely on the government or others.
In stakeholder capitalism, shareholders are still king.
In the free-market oriented business school I attended, we were lectured on “stakeholder capitalism”. In the liberal grad school I attended, it seemed every course would have a discussion of sustainability, fairness, governance, and the like.
Something that has become extremely clear to me, is that many people don’t quite understand what stakeholder capitalism involves. Some imagine the erosion of shareholder returns, hippy-dippy CEOs giving pay raises to everyone, and board meetings becoming “woke”.
But is that really the case?
Let’s take a look at a commonly accepted vision of stakeholder capitalism, the one proposed by Karl Schwab, founder of the World Economic Forum.
In his “Davos Manifest”, he attempts to offers a “universal purpose of a company in the fourth industrial revolution”.
The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large.
This is achieved by:
- “providing a value proposition that best meets [its customers] needs.”
- “treating its people with dignity and respect.”
- “considering its suppliers as true partners in value creation.”
- “continuously expanding the frontiers of knowledge, innovation and technology to improve people’s well-being.”
- “responsibly managing near-term, medium-term and long-term value creation in pursuit of sustainable shareholder returns that do not sacrifice the future for the present.”
Now I don’t know about you, but as I read these elements, I don’t know how it would be making shareholders a disservice. Essentially providing good products, treating people with respect, generating synergies through partnerships with suppliers, and seeking to improve the quality of the services and products it offers.
We do all of these things, in the company I run with my father Robert. Not altruistically, but because it’s good business.
There are other parts of the manifesto which are more abstract however, like the idea of “providing a fair chance to new market entrants”. I’m not sure what that means. How does Google (GOOG) offer a fair chance for someone to enter the browser market? How does Union Pacific (UNP) or BNSF offer a fair chance of someone entering the American rail network market? How does Amazon (AMZN) offer a fair chance to other retailers?
The confusion is also felt with the idea that a corporation should “accept and support fair competition and a level playing field”. This is fine, so long as it is not interpreted that a “fair competition” is one where everybody wins. In fair competition, it must be accepted that the winner might take all.
After all, nobody ever forbid you from inventing Microsoft’s (MSFT) Windows, it just so happens that you didn’t do it. As much as it saddens me, neither did I.
I’m all for fairness. But fairness is brutal. If fairness is viewed as fluffy egalitarianism, we might have a problem.
Concerns about the environment in the context of stakeholder capitalism might also be misguided. I agree that we should do all that we can to protect our planet, and ensure its livelihood for decades and centuries to come, so long as we can reconcile it with the world’s desire for more abundance. The solutions are not as clear cut as some might think, as I explained in my recent article “Clean Energy vs Oil & Gas: the biggest lie of 2020”.
All in all, the practical applications of stakeholder capitalism are to promote long term value creation. By considering all stakeholders interests, companies will make choices which ultimately increase long term profits.
Dividend investors are all about the long game.
At no point do I want a company to increase its dividend by more than it should, if it means it will run into trouble down the line. At no point do I want a company to squeeze every last dollar out of its suppliers, if it means it will hinder product quality. At no point do I want employees to be poorly treated, badly paid, so that they become unproductive & unmotivated. At no point do I want management to mess with the numbers to make short term profits look good at the expense of future profits.
Investing in high quality companies, what we call All Weather stocks, is an exercise of stakeholder capitalism.
The altruistic, fluffy side of stakeholder capitalism, cannot be applied, as anybody with a little discernment can punch so many holes into it, that it resembles swiss cheese.
What is left, is a framework which promotes high quality capital allocation, which, if done successfully, is what dividend investors are looking for.
But good stakeholder capitalism isn’t always obvious.
America produces companies which are able to sustainably generate large amounts of value for its stakeholders.
However, in some cases, the value generated is not as clear. Some companies provide value while creating some externalities for certain stakeholders. For instance oil companies have the consequence of polluting the environment, but they generate tremendous value for shareholders and for consumers.
In a sensible stakeholder approach, you’d have to carefully weigh the pros and cons, and the opportunity cost of not pursuing these activities.
Or consider tobacco. Smoking is bad for you, and shaves 20 years off your life. I was hooked on cigarettes for years before quitting. I started smoking a few cigarettes with friends in high school, and developed a daily habit as an undergraduate student. While I grew to hate the habit enough to quit it and reclaim control on my health, it would be plain wrong to say that cigarettes provide no value.
They do provide value. People smoke to reduce stress, some find it pleasurable or others because its something enjoyable in social situations. This is valuable. However it is a case where the costs far outweigh the benefits: shorter lifespan, higher risk of disease, financial pressure, bad smell, etc.
Overcoming addiction is hard, but at the end of the day, we are all free individuals, capable of making our own choices. The thrill of a nicotine kick now, or higher risk of cancer.
The thrill of a burger or a slice of chocolate cake, or six pack abs and healthy arteries.
The “woke” public might not appreciate that nothing is black or white, and that everything is grey.
For this reason, a discount might be placed on stocks from certain sectors. Access to capital might be tougher if black/white world views are imposed on stocks. It might also mean that you get a few more points of yield, because of the “shame” of owning such stocks.
What makes American capitalism great:
Biden or no Biden, stakeholder capitalism or not, American capitalism is great at what it does.
America gets a lot of bad press because of its rising income inequality. The one percent’s share of American income went from 10% to 20% between 1980 and 2016. In Europe, the same trend cannot be observed: it went from about 10% to 12% over the same period.
This brings to many questions: one which is why has this happened in America?
It is hard to pinpoint the rise of inequality, but here is some food for thought:
- Labor’s share of income has declined due to pressure from globalization, as more supply of workers competes for jobs which don’t necessarily need to be done domestically. Other pressures such as deregulation might have come into play. It is also possible that there is a skill gap, and that skills have not been supplied in a way which keeps up with demand.
- While labor was facing downwards pressure, a few created vast fortunes through entrepreneurial success.
My understanding is that downward pressure on wages from globalization and other factors has also existed in Europe. What doesn’t exist is technological success at the American scale.
Consider the following: of the 16 wealthiest people in America, 10 have made their fortunes through technology. The four richest: Bezos, Gates, Musk, Zuckerberg, all made their fortunes through tech.
Of the 16 wealthiest Europeans, none of them made their wealth in tech.
Michael Moritz, the VC investor of Sequoia Capital, wrote:
Over the past five years, the eight most valuable technology companies developed in Europe have assembled a combined market value of around $32 billion. That’s not a figure to be sneezed at any more than the admirable young European technology entrepreneurs who, despite all odds, are more inclined to take a risk than members of their parents’ generation. But EU legislators should be wondering why Europe’s eight most valuable companies are only worth about 10 percent of Facebook or 6 percent of Google.
So the increase in inequality in America, which hasn’t happened in Europe, could well be due to the fact that wealth wasn’t created in Europe in the same way that it was in America.
Why not? Multiple reasons: inflexible labor markets, lack of access to VC capital, and a heterogeneous home market.
That last point is one that cannot be understated. My business caters to Americans because of it. Launching a company in Europe means either a) having a small pool of potential customers or b) having to deal with multiple languages, cultures, and values.
But how bad can this income inequality be?
When it’s put in context, it just isn’t that bad.
The United States average annual income (which includes salaries, capital gains, dividends and the like) is the 9th in the world, at $65K per year. Ahead of it lie small countries like Luxembourg, Monaco, Switzerland, Lichtenstein, which are not really fair comparisons. Behind it lies all of its less unequal, European counterparts.
Of course averages don’t play well with inequality, let’s look at some median household values per capita. These are adjusted for purchase power parity, giving a really good idea of household income.
The US is number 6. It must be pointed out that the 5 countries which are ahead of the US are about as populous as California, once you combine their populations.
The 50% of Americans who live above the median household income, represents a lot more people than the 50% of Swedes, Danes, or Australians who live above their median.
So although Americans are unequal, the majority of them still seem to be doing quite well.
At the extremes, it’s relatively not that bad either. 11.8% of Americans live under the national poverty line. In Denmark, it is 13.4% of people. In France, it is 14.2%. In Germany, it is 16.7%.
Higher median incomes. Lower poverty rates… and better off retirees?
One argument that is often brought up is that European state pension plans give better conditions to retirees than in America.
First, this is flat out wrong. Although Social Security checks are modest, the average being about $1500 per month, it is not much better elsewhere. In France, it is about 1500 Euros, or about $1700-$1800. That is an improvement, but how much of one is it really? When you look under the hood, it looks a lot rosier for American retirees.
In a survey conducted by ING, (link to pdf) the financial services firm attempted to gauge retirement across 15 countries, including the US and European companies. This Forbes article provides a good summary.
In terms of maintaining retirees previous standard of living, the U.S. is much more successful than European retirement systems. In the U.S., 47% of retirees either “agreed” or “strongly agreed” that they could maintain their pre-retirement standard of living. Only Luxembourg was more successful, at 53%. But overall only 28% of European retirees agreed they could maintain their pre-retirement standard of living, including only 14% in France and 26% in Germany.
According to OECD data, U.S. retirement plan assets are far larger relative to our GDP than in the typical developed country. In the U.S., assets held in government or employer-sponsored retirement plans are equal to 150% of GDP. The OECD figures don’t even count the $10 trillion held by households in Individual Retirement Accounts, which would boost the total by another 45% of GDP. In the median OECD country retirement plan assets equal just 19% of GDP. Their Social Security plans may be more generous, but their retirement savings don’t match ours.
If the big difference comes from savings, it follows that it also comes from investments.
In US, 52% of households are invested in the stock market.
Source: Pew Research
The 401(K) is mainly the reason for such widespread participation in the stock market in the US.
In Europe the participation rate is a lot lower.
Source: Research from the University of Gent (link to pdf)
It can’t be underscored how much this is deeply ingrained into European cultures. While I was launching our business (and still to this day), whenever I explained what we do “provide dividend investors with tools to retire freely” people were extremely sceptical. “Why would you need to invest for retirement?” is not an uncommon question, believe it or not.
So to summarize: American capitalism produces more innovation because it offers a large consumer market, a large pool of talent and capital, and a culture of risk taking. While this results in inequality, it also results in higher wages, and better retirement conditions thanks to participation in the creation of wealth throughout the stock market.
Note: This is not to say there are no problems in America. Rather it is to suggest that nowhere is perfect. Often the grass looks greener on the other side, until you get to the other side, and realize that the vision we held was romanticized, and in most cases fiction.
Stocks that fit investors needs.
Because participation from households is so low in Europe, the need to have stocks which meet the needs of households doesn’t exist.
In the US, since the participation rate is higher, and that individuals will depend on their investments to retire, there is an argument to be made that there is demand for stocks as income producing vehicles.
This might be part of the explanation as to why there is no such thing as “dividend aristocrats” in Europe.
A list of 39 European stocks can be found with a quick Google search for European Dividend Aristocrats, but they don’t really pass the smell test. Not only is the list limited, they don’t constitute real dividend aristocrats, as the requirement is that they have increased or sustained dividends for 10 years.
A company that has increased its dividend for 20 years every year would not quite be considered an aristocrat in the US.
And for those of you considering China (as I’ve been), the highly political suspension of Jack Ma’s Ant IPO recently serves as a reminder, that in China, prosperity remains dependent on the will of the party. There are also limited options for dividend investors.
America offers a large consumer market, a history of innovation & trust, and shareholder friendly companies (which happen to take care of all stakeholders).
The American stock market is the ultimate vehicle for a nobody like me to generate sustainable wealth.
Examples of great stocks.
There are stocks that provide phenomenal shareholder returns, while posing little risk of coming under scrutiny and having trade-offs in value creation and value destruction.
The stocks listed below are some of the stocks from the All Weather dividends portfolio which score “low” on Sustainalytics’ ESG risk ratings.
At the same time they are superior companies with histories of paying strong dividends, which we believe trade at good value now.
First you get REITs. Because of their line of business, they offer little risk of ESG scrutiny.
One pick we like at current prices is Federal Realty (FRT), which, despite significantly improved liquidity and rent collection, still trades at rock bottom prices, and offers unheard of 6% yields, well below its normal range (defined as between the 10 year 25th percentile and 75th percentile yields) of 2.65% to 3.19%.
Source: mad-dividends.com (FRT MAD Chart)
Another one is Essex Property Trust (ESS), which yields 3.66%, well below its normal range of 2.68% to 3.08%. Given the stocks history of growing dividends at 6-7%, the current price offers great value on a superior portfolio of West Coast real estate.
Source: mad-dividends.com (ESS MAD Chart)
But low ESG risk companies can be found in all sectors.
Consider Texas Instruments (TXN) among semiconductors. The company is one of the most shareholder friendly that I’ve ever known, is repeatedly profitable. It is a dividend investors dream.
Source: mad-dividends.com (TXN MAD Chart)
Its current yield of 2.6% places it between its normal range of 2.3% and 2.75%. If you don’t own TXN, the current price is a good place to start a position.
Broadcom (AVGO) is another semiconductor stock for dividend investors to own. It has been growing its dividend at an explosive rate, yet its price hasn’t followed suit. It now provides investors with a 3.4% yield, and potential for double digit dividend growth.
Among apparel companies, the brands which young “woke” individuals enjoy likely face very little scrutiny. V.F. Corp (VFC) excels on ESG ratings, and is a great dividend stock. While I loaded up when it yielded more than 3.5%, and will only add more at 3% or above, you might want to consider it, given that its normal 10 year dividend yield range was between 1.85% and 2.54%, yet the stock currently still yields 2.74%.
Source: mad-dividends.com (VFC MAD Chart)
*note: the dividend reduction was due to the spin-off of Kontoor Brands (KTB), investors didn’t actually loose any income.
I’ll give one final example, with a little known dividend stock, which is of extremely high quality, yet remains historically undervalued: Nexstar Media (NXST). It has low ESG risk, and its dividend yield of 2.54% is well above its 1.4% to 1.9% normal range.
Source: mad-dividends.com (NXST MAD Chart)
There are great shareholder friendly stocks which will fly under the radar of all ESG concerns. For me, ESG isn’t enough to exclude or validate an investment.
I own shares of tobacco stocks, of oil producers, because at the end of the day, they have sticky products, are profitable, and in the case of oil necessary for the economy.
I have no doubt in American capitalism. I don’t think any politician would be able to kill America’s entrepreneurial spirit. However they might be able to kill the US Dollar. I addressed this risk in a recent article, where I explained why I’ve been buying Bitcoins (BTC-USD) as an inflation hedge, and holding more currencies including the Yuan, the Indonesian Rupiah, and Euros.
American capitalism might need to be polished around the edges, but it has proven to be an incredible wealth creation vehicle. The split of this wealth has become unbalanced, but you can take part in it by owning equity in great American companies.
One last word…
…With all the noise in the media it can be hard to focus on ensuring your freedom. If you’re interested in building an all weather dividend portfolio which will lead you to dividend freedom, hit the orange “follow” button at the top of the page. In upcoming weeks, we’ll be launching our marketplace service, giving investors all the tools & knowledge they need to reach their financial dreams.
Disclosure: I am/we are long AVGO, TXN, FRT, ESS, BTC-USD, PM, VFC, NXST, UNP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.