Tagged: stock repurchases

The Reality Discount

If reality were measured like stocks in multiples of earnings, how much should we discount it?

Alert (and good-looking) reader Karen Quast sent a Feb 8 story from The Atlantic by entrepreneur Nick Hanauer, Amazon investor and founder of aQuantive, acquired by Microsoft for $6.4 billion. Called “Stock Buybacks are Killing the American Economy,” Hanauer’s treatise contends companies have shifted from investing in people and stuff to trafficking in earnings-management.

While Hanauer’s real target is sociological, he offers startling statistics compiled at theAIRnet.org. Companies in the S&P 500 have repurchased $6.9 trillion of stock the past decade including $700 billion last year.

The Sept 2014 Harvard Business Review ran a similar story by UMass professor William Lazonick called “Profits Without Prosperity.” Mr. Lazonick says S&P 500 components between 2003-2012 spent 54% of profits, or $2.4 trillion, on buybacks, and another 37% ($1.6 trillion) on dividends, thus sending 91% on to holders.  What strikes me is that companies must’ve borrowed roughly $3 trillion more for buybacks.

Hanauer also nods toward GMO Capital’s ($120 billion AUM) James Montier, whose incendiary white paper “The World’s Dumbest Idea” (drawn from a Jack Welch observation) has been the subject of contention in the investor-relations profession and beyond.  Montier claims a tally of buybacks from the 1980s forward shows firms repurchased more shares than were issued.

If that seems to defy the existence of the stock market (if more shares were bought than offered, how are there any to trade?), it doesn’t. There once were nearly 8,000 companies in the Wilshire 5000 while today it’s 3,750 (you’d think the Wilshire 5000 described the number of companies in it), a 53% freefall. But the big have gotten bigger, with US market capitalization about $2.8 trillion in 1988 and $25 trillion today (rewind to 1950 and total market cap was $92 billion – equaling just, say, Biogen Idec’s market cap now). (more…)

Losing Purchase

Say you were house-hunting in a hot real estate market. Would you Tweet: “I’m going to buy the house at 1342 57th Street, and I’m headed there right now.”

If you want a good deal, do you wave your hands and try to summon others to compete with you?

So why do companies announce stock repurchases?

Forget disclosure for the moment, or lowering shares outstanding to offset incentives. Sure, there’s a bit of the blue-light special. A repurchase wants attention in the sense that it signals “we think this is a great use of cash.” It blunts bad news: “Our margins were down this quarter – but guess what? The board said to buy $500 million of stock.” That’s a positive value action to forestall a negative value message.

In both cases, it’s also a marketwide Facebook post proclaiming that “we are about to spend money here.”

Let’s apply common sense now. Isn’t that antithetical to the wise deployment of shareholder resources? If you want a good deal, cut out the middlemen – don’t hail them from all over the globe to get between you and the thing you want to buy. (more…)

Dividends and Buybacks

Would you rather ride your road bike in the sun or the rain?

What if riding in the sun means peddling across Death Valley in the summer, while the rain is a passing shower in the Italian Dolomites?

Context is essential. Let’s apply the same thinking to decisions about stock-repurchases and dividends. Conventional wisdom has long held that both actions appeal to the kinds of stock buyers who hold securities and count on fundamentals.

No argument there. But ponder the third dimension in the IR chair. The first dimension is your story – what defines and differentiates your investment thesis. The second is targeting the kind of money that likes your story. The third dimension is the state of your equity store.

Your equity is a product, competing with other products, with unique supply and demand constraints. If you suppose that your story is correct for a particular buyer without considering whether the buyer can act on interest in your story, you’re leaving money on the table. So to speak.

For instance, if I want four Keith Urban tickets at Pepsi Center in October for no more than $50 each, I’m already sold on the investment thesis – “Keith Urban puts on a good show.” What if there are only two tickets available at $50? Well, I’m not the right buyer for the investment thesis, then. (more…)