Bye buybacks

McDonald's wage hike portends shareholder diet

Well-fed shareholders may be in for a payout diet. After a record $900 billion of buybacks and dividends from S&P 500 Index members in 2014, US companies - including McDonald's, which unveiled wage hikes on Wednesday - are beginning to pay workers more. The wads of cash companies hand investors are set to become thinner.

Economists often compare the returns of capital and labor. Capital is clearly winning. Last year S&P 500 payouts to shareholders increased by 15 per cent, while wages rose just 1.7 per cent, government numbers show. Since 2010, the trailing three-year average for shareholders is up 66 per cent and workers 5.8 per cent.

More detailed analysis shows the same pattern. The trailing three-year average of median worker pay for US food services is up only 1.2 per cent since 2010, according to consultant Payscale. Shareholder cash at three of the largest such companies - McDonald's, Yum Brands and Darden Restaurants - was up 36 per cent over the same period.

Average wages are already set to rise in these relatively low-skill industries. Nearly half of US states boosted the minimum wage earlier this year. McDonald's is the latest in a growing list of big employers of low-wage workers to announce higher pay. Wal-Mart, for example, did something similar in February. The effective floor might be creeping up.

True, the national statistics show almost no signs of significantly higher wages yet. But lower unemployment typically leads to upward pressure on wages. A five per cent rate was the crossover point in past recessions. The current jobless rate is 5.5 per cent, and falling. Labor's gain is likely to be capital's loss.

Within the capital account, equity has been thriving and debt wilting, thanks to the central bank's ultra-cheap funding. But rate increases are expected to start later in 2015. More cash dedicated to debt service will gradually leave less for shareholders, and will reduce the appeal of issuing bonds to fund share buybacks.

A stronger economy is generally a more expensive one. The costs of real estate and healthcare could rise more steeply again. Of course, revenue will also increase for big companies. But there still may not be enough to keep shareholders from feeling a little hungry.