Don't Miss the Profits in Crony Capitalism
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The ideal of free markets, utility optimizing competition, and a strict split between economics and politics sounds very attractive. The real world is not as clear cut. In reality, corporations and governments work together to create and craft markets in which capitalists compete. By looking at the amounts corporations spend on lobbying, investors can learn which companies are taking a proactive approach to safeguarding their profits and markets.
Is there evidence that lobbying is profitable?
How much did finance, real estate, and insurance spend on lobbying between 1998 and 2012? They spent $5.3 billion, second only to the general business sector. Anyone who remembers TARP or the host of other government bailout projects will knows that this lobbying paid off handsomely.
Which companies lobbied the most in 2012?
General Electric (NYSE: GE) spent $21,120,000 on lobbying in 2012. GE is known as a manufacturer and industrial conglomerate, but the reality is that its finance arm plays a very important role in driving profits. Earlier the firm successfully convinced the federal government to change the tax code so that it could operate a more profitable leasing and lending business. By routing the financing through overseas divisions and keeping profits overseas, GE is able to decrease its tax bill substantially.
In 2012 the firm had a pre-tax income of $17.4 billion and a tax bill of just $2.5 billion. GE needs to continue lobbying in order to ensure it can pay less than 15% of its income in taxes. With a gross margin of 55.9% and a profit margin of 9.4%, the company is very profitable. Lobbying is a critical tool to ensure profits.
Google (NASDAQ: GOOG) spent $18,220,000 in lobbying in 2012. The online search market is Google's bread and butter. It is not surprising that the company has a profit margin of 21.4% and a return on investment of 14.4% given its large market share. For a large company with more than $50 billion in revenue in 2012, such margins are not easy to maintain. Google's secret is its stable duopoly with Microsoft. With more than 65% market share in the online search market Google has very strong pricing power.
Running a monopoly or duopoly is great from an investor's perspective, but the U.S. government tends to sour on such blatant control. Google saw a strong antitrust push back when it bought the travel software company, ITA. The government only approved the deal after influencing Google's pricing strategy by saying that ITA had to continue selling its services at “commercially reasonable terms."
Without a strong lobbying budget, Google increases its risk of being slapped with an antitrust case.
Export constraints on sensitive military technology only constrict Northrop Grumman's potential customer base. The U.S. is slowly winding down its wars in Afghanistan and Iraq and the firm is fighting government cuts from all sides. Already the company is planning to place the ax on 350 jobs in its electronic systems sector.
Earnings per share estimates for 2013 come in around $7.03 while management gives a range of $6.85 to $7.15. This is a significant decrease from earnings of $7.96 in 2012. With a drop of almost $1.00 per share Northrop Grumman needs every cent of its precious lobbying budget to try and avoid budget cuts or push them onto its competitors. The firm is still profitable with a return on investment of 14.7% and a profit margin of 7.8%, but investors and management need to be cautious in midst of the current political uncertainty.
AT&T (NYSE: T) spent $17,430,000 in lobbying in 2012. The telecommunication market is very similar to the search engine market with a few large players. In Europe, governments are involved with market pricing and infrastructure to a much greater degree than in the U.S. This gives the consumers better quality services at lower prices. AT&T is like any good corporation and understands that more capital investments and lower prices would not be great for the bottom line.
The company isn't content to spend its days slowly accumulating cash. It is trying to destroy a number of public telecommunication assets in order to increase prices and profits. The firm's gross margin of 56.7% and profit margin of 5.9% are not as high as Verizon's, but it still is a very profitable company. With a net income of $7.3 billion in 2012, a $17.4 million lobbying bill is a very prudent use of cash.
Where to invest?
Controlling the market and the regulators is a surefire way to make money. Google's recent FTC settlement was little more than a slap on the wrist and demonstrates that the company is effectively managing the threat of future antitrust suits.
The company has continually increased its lobbying budget over the past couple years, showing that management is well aware of the use of regulatory capture to maintain profits. With a growing market, market share over 60%, innovative technology, and proactive risk management, Google is a strong investment. In contrast, Northrop Grumman is facing declining government sales while AT&T and General Electric are in older, more stable industries. These companies simply are not exposed to growth to the same degree as Google is.
MrCanadian1 has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of General Electric Company, Google, and Northrop Grumman. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!