Activists cry foul over General Dynamics stock buybacks
BATH
As Bath Iron Works seeks a $60 million tax credit from the state, activists are crying foul over its parent company’s practice of stock buybacks.
The debate highlights a stark difference in views about BIW as a company. Representatives of the company paint a picture of a locally operated and somewhat independent company that has to prove itself to its parent company, defense contractor General Dynamics. Activists, however, have offered a competing narrative, arguing that BIW is just a small cog in the corporate machine that is General Dynamics.
The two competing narratives lead to very different conclusions over whether the state should grant BIW $60 million in tax credits.
Why repurchase shares?
According to reporting by the Providence Journal last year, General Dynamics has invested $10.3 billion in stock buybacks since 2013. But what exactly are stock buybacks?
Stock buybacks occur when companies repurchase their own shares. Since a company cannot be its own shareholder, what this does is reduce the number of outstanding shares, increasing the value of stocks owned by shareholders. The action is fairly commonplace in the corporate world, and often signals that the company has large amounts of cash on hand, but has nowhere it wants to invest. Other times, it can mean that the company believes its stock is undervalued and stock repurchases are necessary to bring stock prices to a more favorable value.
General Dynamics’ annual reports show that the company has been repurchasing shares continuously since at least 2008. In 2016, the company repurchased 14.2 million shares for $2 billion, and the year before that they purchased 22.8 million shares for $3.2 billion. Since 2013, the company has reduced its outstanding shares by 14 percent.
According to those reports, its practice of stock buybacks has allowed it to return more money to investors. But the question raised by opponents is: Why ask the state of Maine for money when you’re choosing to give cash to shareholders instead of invest in the shipyard?
$3 billion company
Whatever possible benefits the practice might have, opponents of the bill say the stock buybacks simply signal that General Dynamics has the cash on hand to invest in BIW, but chooses instead to use it to increase dividends to shareholders.
“When they have so much cash flowing around, how is it that they’re coming (to the state of Maine)?” said Gary Anderson of Bath, a columnist for The Times Record who has been following BIW developments for years.
“You can only do buybacks when you have excess cash,” Bruce Gagnon, coordinator of the Global Network Against Weapons & Nuclear Power in Space, told The Times Record. “So they don’t need any money from a poor state like Maine. That really infuriates me.”
Why should the state be giving money to BIW, he asked, when that money could be put toward a number of social and infrastructure problems Maine currently faces?
“It’s obscene,” he continued. “It’s a dirty culture that we’re living in, where the corporate culture is all about maximizing profit and not giving a damn about the people, the workers, the conditions of the communities.”
In many ways, the practice of repurchasing stocks has become a rallying point for those who believe that the state shouldn’t be giving a tax break to a company that makes billions of dollars in profits annually.
The company reported $31 billion in revenue for 2017 in January, with about $3 billion in profits.
During the public hearing on the tax bill last week, several opponents raised concerns over corporate profits, pay and stock buybacks.
BIW responds
While BIW representatives declined to comment specifically on General Dynamics’ stock buybacks during the public hearing or in requests for comment to the company, in a prior interview with The Times Record editorial board in January BIW President Dirk Lesko and BIW VP and General Counsel John Fitzgerald addressed some of the concerns raised about BIW’s parent company.
Both noted that they’re familiar with complaints that BIW is just an extension of a company raking in billions annually.
“I certainly understand that perception,” Fitzgerald said. “I think a lot of it does come with sort of the concept that it’s a big corporation from away that owns you, and they don’t care about things locally. And I think that’s fed not so much by our own actions but by perceptions and external events.”
“I get it, and the idea that ‘geez, it would be nice if this was owned and held close’ is novel, but it’s really not very practical for defense contracting on the scale that we’re on,” said Lesko. “And again, having been there for awhile, General Dynamics is a responsible, committed parent corporation.”
Lesko, who’s been with the company for 25 years, noted that GD’s ownership came with a number of advantages for the shipyard, which had been owned by a series of investor groups with no experience in the shipbuilding business. With GD ownership came expertise, shared institutional knowledge with other shipyards, and access to capital investments, added Fitzgerald.
But in their narrative, the benefits of existing within that corporate framework comes with the expectation that BIW be independently profitable.
“I think General Dynamics, like any other corporation, is going to invest where they see a return. And the returns in their other business units are greater than they are at BIW,” Lesko said. “So we are challenged to operate a business that requires considerable capital investment and constant capital investment in an environment where our volume has steadily declined across the last two decades, and compete for work even if those competitions are fairly specific and few and far between.”
In other words, even if General Dynamics as a whole brings in billions in profits, BIW has to be independently contributing to those profits to remain an asset to the company. Within Lesko and Fitzgerald’s narrative, BIW is operating on much slimmer margins than their parent company. Tax credits like the one proposed means that General Dynamics doesn’t need to invest as much in the shipyard, and it provides more net profit.
BIW, however, has not publicly produced numbers to back up this explanation or show how much profit it provides to General Dynamics annually. It has also declined to detail how much the company receives in tax expenditures from state or municipal programs, as previously reported by The Times Record.
The Legislature’s Taxation Committee will conduct a work session on the bill at 1 p.m. Thursday at the State House, where they may decide whether or not to move the bill forward with a favorable report.
nstrout@timesrecord.com
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