Why politicians are worth buying

When companies give to candidates, their stocks perform better. That might not be the recipe for a great democracy, but it makes for a better portfolio.


By Michael Brush

Want to find a great stock? Find a donor.

A political donor, I mean.

Here's why: Companies that give money to political campaigns have better-performing stocks, according to a new study, than companies that don't contribute. It's no small gap, either. Corporations that give the most have beaten the market by 2.5 percentage points a year over the past 25 years.

"It doesn't surprise me at all," says Charles Gabriel, a longtime political analyst with Prudential Equity Group, a division of Prudential Financial (PRU, news, msgs). "Unfortunately, an investment in Washington pays off."

What is surprising is how much companies get for so little money. The public companies that do give money, on average, fork out just $1,700 to $2,000 per campaign and support an average of 56 federal candidates in each two-year cycle.
Spreading the wealth
The study, "Corporate Political Contributions and Stock Returns," could double as a how-to guide for companies looking to buy influence. The best approach to giving, for instance, isn't to buy a single lawmaker. Rather, companies that contribute to the largest number of political campaigns get the biggest benefit.

"Much like a venture capital portfolio of many startups, a few of the supported candidates will 'pay off big' and result in increases in firm shareholder wealth," says the study, which tracked the impact of more than 1 million corporate campaign contributions by about 2,000 companies from 1979 to 2004.

* Talk back: Do candidates' finances influence your opinion and your vote?

The study used a model portfolio of all companies that donated significant amounts to federal political campaigns. The researchers gave more weight to companies that made the biggest contributions and rebalanced the portfolio once a year. They ranked companies by contributions from the prior five years and updated the portfolio based on that measure every year.


So why do companies get so much for so little? One of the study's authors, finance professor Huseyin Gulen of the University of Michigan, offers a few explanations.

* The average corporate donation of around $2,000 may seem small, but it is large compared with the typical $115-per-campaign contribution from individuals. So even though individuals account for the lion's share of any single candidate's campaign war chest -- 40% to 80%, compared with around 10% from companies -- the corporate donations stand out.

* A relatively small donation may serve as a proxy for bigger favors companies do for politicians. Think flights on corporate jets, expensive dinners and hosting of fundraisers. "The direct cash contribution is just one of a number of things," agrees Gabriel.

* The study looks only at contributions from corporate political-action committees, which collect funds from individuals inside companies. The study does not tally "soft money" contributions to special-interest groups that pay for things like issue advertising or voter-registration drives.

The value of a Democrat
Several conclusions about the benefits of corporate support for politicians seem fairly obvious. But they're worth noting for anyone who wants to track campaign contributions -- posted at the Federal Elections Commission Web site -- as an investing tool.

Companies get more bang for the buck if they support:

* More-powerful politicians, such as congressional-committee heads.

* Home-state candidates.

* Candidates for seats in the House, where budget and tax laws originate.

Though companies support Republicans more than Democrats ($43,000 per election cycle compared with $31,000, on average), they get a bigger payoff by supporting Democrats. Companies that tilt their contributions to the left, and to home-state candidates, outperform the market by 3 percentage points a year, on average.


Does this mean Democrats are more easily influenced by campaign contributions? Not necessarily, says Prudential's Gabriel. Instead, Democrats are more likely to hold swing votes because Republicans have more of a natural inclination to support laws that favor business. "If you are trying to assemble a critical mass of votes, that marginal Democratic vote is worth a lot. Democrats are the ones that get you over the hump," Gabriel says.
Bullets and beer
It's easy to imagine why big defense contractors that top the campaign contribution list (see box on next page) might get a boost from contributing to lots of political campaigns. After all, companies such as Lockheed Martin (LMT, news, msgs), Boeing (BA, news, msgs) and General Electric (GE, news, msgs) rely directly on government contracts from defense agencies, and Congress regularly has a say in large weapons programs.

"Besides, emergency supplemental spending bills for Iraq now provide a quarter to a third of defense spending," estimates Gabriel.

Federal regulators have such a big say in so many aspects of business that just about all companies are touched by Washington in some way or another. "If you don't protect your interests in Washington and become engaged in the policy debate affecting your industry, there's a risk that your competitors will shape the legislative environment," Gabriel says.


The list of potential impacts is long: government contracts, regulations, tax laws, trade laws, etc. "You never can tell what might come up," says David Merkel, an analyst with Hovde Capital, based in Washington.

The companies say contributing to campaigns is good for their interests and the country's. General Electric says it makes political campaign contributions as part of its effort to let the government know "how its interests are affected by public policy choices" and to share insights on the effects that policy choices have in the marketplace.

Anheuser-Busch (BUD, news, msgs) probably has a strong Washington presence in part to keep an eye on any emerging efforts by anti-vice groups to stem alcohol use or put limits on advertising, says Matthew Reilly, an analyst with Morningstar (MORN, news, msgs). "There are always going to be issues associated with alcohol," he says. "There is always going to be some element that will want to curtail drinking."

Anheuser-Busch also benefits from a three-tier distribution system that deliberately places wholesalers between producers and retail outlets -- a hangover from the Prohibition days that retailers such as Costco Wholesale (COST, news, msgs) want to see go the way of bathtub gin.

Anheuser-Busch benefits because the system makes it harder for smaller competitors to get access to retail shelves because they have to convince distributors that sales will be robust enough, Reilly says. "Distributors can be a significant barrier to entry if you are a small guy," he says.


Favors delivered?
Here's a quick rundown of what the companies that contributed to the largest number of campaigns may have wanted, or still want, in return:

* FedEx (FDX, news, msgs) and United Parcel Service (UPS, news, msgs) benefited last year from a postal bill that outsources some mail delivery, Gabriel says.

* Big insurers Aflac (AFL, news, msgs) and MetLife (MET, news, msgs) would like to see a single, national charter to do business, like the kind that banks have, says Merkel, who tracks insurance companies at Hovde Capital. That's not likely for property and casualty insurers, Merkel says, but for other lines such as life insurance, "there are always rumblings," he says.

* Wal-Mart Stores (WMT, news, msgs), which buys many of its goods from low-labor-cost countries such as China, wants to influence trade policy. It's also seeking a banking charter to save on processing transactions, a move opposed by segments of the banking industry, says Gabriel.

* Verizon Communications (VZ, news, msgs) and AT&T (T, news, msgs) want to have a say in cable regulation as they roll out entertainment services through fiber-optic networks. They'd also like to be able to charge content providers a premium for superior access to their networks, which would end the current convention of "Internet neutrality" that treats all traffic equally.

* Bank of America (BAC, news, msgs) could gain if Washington lifted a cap on how big banks can grow by acquisition, says Morningstar analyst Craig Wolker. The current 10% market share limit serves as an obstacle to its long-term strategy of expanding by purchasing smaller banks.

* Energy companies such as ExxonMobil (XOM, news, msgs) want to have a say in how Washington rules on lots of issues, including how much oil companies pay in royalties on federal land leases and changes in alternative-energy policies. They also are opposed to proposals that would eliminate tax breaks they receive. Having pocketed $40 billion in profit last year, ExxonMobil may have a few dollars left over to spend on trying to influence those decisions.

Please see the charts on page 2 of this article

Page 1
http://articles.moneycentral.msn.com/In ... uying.aspx

Page 2
http://articles.moneycentral.msn.com/In ... spx?page=2