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Profits Over Employees

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Why do stocks go up? It’s quite simple really. Corporations don’t owe anything to anyone except their shareholders. That’s right. It doesn’t matter if you are CEO, CTO, or the most important employee on the floor. It doesn’t matter if the company is earning over $2 billion dollars every 3 months. What really matters is what the shareholders want and what shareholders want are rising profits and higher share prices.

So it comes to no surprise after last week’s release of Canadian bank earnings that one of the big banks, the Bank of Montreal, decided to take action on slowing profit growth. The bank “only” made $1.9 billion over the last quarter, but decided that to improve profits and margins the bank had to cut jobs.

Yep that’s right! A bank that is already making $1.9 billion in 90 days, or over $21,0000 a day decided that it was necessary to cut 5% of it’s global workforce. That’s more than 2,200 jobs that the bank decided to cut.

Haters Going To Hate

A lot of people reading this blog are going to hate what the bank is doing. We should tax bank profits more shouldn’t we? We should be advocating for the little guy who is doing the work rather than the rich shareholders? Or why does the CEO deserve to keep their fat bonuses when the hardworking clerk on floor 15 works his ass off till 9pm every night only to get canned.

They are all valid arguments, but these are very ignorant comments. For one, the bank’s priority is to work for the owners. It’s for the very same reason why owner’s of real estate keep raising rents. They want to profit. There is nothing wrong with that. If business were run not to profit, they wouldn’t exist. They would go bankrupt.

Two. The majority of the owners of these big banks are not rich aristocrats that are partying on a yacht somewhere in the Mediterranean. In fact, a lot of large corporations in Canada are owned by all us. Yes, that’s right we all own a part of these companies because large institutional investors like CPP and OMERS and all sorts of pension funds hold a lot of stocks in these companies. To say that the bank is not working in your favour is ignorant. How would you like it, if your CPP payout when you retire went to $0. Yes. What if all these big corporations went bankrupt? Would you be happy that your pension no longer exists?

And third, CEOs are paid the big bucks to make these kind of important decisions that affect not just the spreadsheet that sits in front of your face, but decisions that have wide impacts on millions of people. Quite frankly, many people have difficulties making these tough decisions. Can you live the fact that your decision has an impact on over 2,200 families? Can you sleep at night knowing you might put a family on the street? I know many people that can’t even decide if the colour for a website should be navy or royal blue. Imagine if those people made the major decisions at the bank.

Why Hate, Join It

I make the same statements time and time again. Why hate the big corporations when you can join them. Why get angry whenever a corporation makes billions in profits when you could be taking a piece of the pie.

BMO-10year

Over the last 10 years the growth of Bank of Montreal’s stock has been phenomenal. In fact, any Canadian bank over the last 10 years have had exceptional growth. However, most Canadians never took advantage of it. That’s because most Canadians invested their money in GICs and high interest savings accounts. Rather than getting a return of over 80% over the last 10 years in just capital gains alone, the average Canadian got maybe 20% gain overall with their money market funds.

It’s true that over those 10 years, BMO stock has had it’s ups and downs. In fact, there are years where the stock was negative and actually loses money, but what the graph doesn’t show is that on top of the exceptional growth in the price of the stock, the stock has also been dishing out a 4% dividend per year.

Not only would you receive an average growth of just over 6% per annum from capital appreciation, you would also get 4% on top of that. That’s like an average of 10% return on investment per year? What else can give you 10% growth per year?

Canadians Still Hate Investing

Aside from the CPP money that we give on our paycheck. Canadians are not saving. In fact, the savings rate in Canada has been mired below 2% for a long time. There’s just no money after regular day expenses and our expensive mortgages.

The reason? Canadians are obsessed with real estate as an investment class. This means for most Canadians, we are not really investing in the corporations that drive our economy, but rather our focus is on fixed assets that are floating in the sky or taking up space on land with zero productivity. Since real estate has risen so much in value, so have the mortgage payments. This means the only one really making all the money aren’t the homeowners, but in fact the banks who are holding over $1.6 trillion dollars in mortgage debt and collecting interest.

While some landlords are making money, the real winner in all of these mortgages are the big banks. While regular Canadians fret over how to make their monthly mortgage payments, Canadians have basically missed out on one of the biggest run up in Canadian bank stock price over the last decade.

While some may think that banks are too risky, one only has to look at just how important the Canadian banks are to the global financial system. Just recently TD has been named a bank in the world that is too big to fail. That means that if anything should happen to TD bank, the governments would bail it out. No one is bailing out our mortgage if a flood hits it or a hurricane rips the roof off, but a bank, that already makes over $2 billion every 3 months is too important.  Life just isn’t fair. ¯\_(ツ)_/¯

So is it too late to invest? It’s never too late. In fact, you should always be investing regardless if the price goes up and down. That’s because investing is about long term focus. Holding for more than 10 years. That’s where the risk is reduced. Those looking to “gamble” and flip stocks for gains can stop reading this blog, but if you are serious about investing, then go look at ways on how to build a balanced diversified portfolio. That’s the best way to get exposure to Canadian banks.

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One Comment

  1. […] Corporate tax breaks implemented by President Trump helped goose profits. Corporate profits in conjunction with low borrowing rates meant that corporations repaid investors through increased dividends and a gargantuan amount of stock buybacks. With cheap money this will continue, as I have already mentioned how corporations will continue to repay investors at the expense of workers. […]

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