Buybacks (part 2)

To follow a theme outlined a couple of weeks ago, my going forward intent in my random musings segments is to view some of the issues of the 2020 presidential campaign under discussion.  My investing rationale has always been that to be successful, one has to understand all possible outcomes which means digging through a lot of crap to discern viable opportunities. It would appear at this early stage that much like 2016, 2020 will have plenty of that to wade through.  As an added bonus, I don’t want to disappoint my newest audience demographic by suppressing my irreverence. As always, these are only observations awaiting an investing opportunity that may never present itself.

The Pitchfork Economics series on buybacks continued on February 26th with Sen. Cory Booker (one of the multitude of Democratic presidential contenders) as a guest discussing his new bill, Workers Dividend Act.  Evidence cited to support his cause is twofold.

  1. American Airlines (AAL) wage increase was roundly panned by analysts.   Booker states the analyst opinions were misguided – which is true. To parlay these opinions into supporting rationale against buybacks is equally misguided as these were partially collectively bargained.  (i.e., benefit to unionized employees which is a goal of the bill.)
  2. His use of Walmart (WMT) as the proverbial case of buyback greed ignores some aspects that are detrimental to his position.  Walmart offers its’ employees matching 401K plans, stock ownership plans with a 15% discount and HSAs, of which some – if not all – allow employees to share proportionately in the “wealth” gained through buybacks.  The choice resides with the employee as to participation.

In an attempt to frame rhetoric with reality, I chose my oldest 15 holdings to identify what happened over the past three years.

Company201820172016
Comcast3.05% decline1.83% decline 3.18% decline
WEC Energy 0.09% decline .09% incr. 16.21% incr.
Chevron0.46% incr.1.33% incr.0.11% decline
Kimberly-Cl.1.77% decline 1.6% decline 1.26% decline
Norf. Southrn3.48% decline 1.93% decline 2.76% decline
Clorox1.19% decline 0.11% decline 0.8% decline
Prosperity B.0.51% incr. 0.28% decline 0.53% decline
Sysco0.5% decline5% decline 3.26% decline
Owens & Minor0.0% change 0.16% decline 0.16% decline
Walt Disney1.51% decline 3.72% decline 4.1% decline
Home Depot2.81% decline 3.82% decline 4.68% decline
PepsiCo0.9% decline 0.96% decline 2.22% decline
Kimco Realty0.62% decline 1.03% incr.1.66% incr.
Towne Bank0.13% incr.0.08% incr.1.05% incr.

Data from MacroTrends

In this scenario (excluding increases denoted bold/italic), the buybacks – as a percentage of the stock outstanding – actually decreased during each of Trump’s years as president despite the tax plan (from 2.1%/1.94%/1.45%).  Companies increasing their share count did so generally to use as currency in lieu of debt. In Chevron’s case this was to fund capital expenditures. Most of the others were for acquisitions.  It’s only slightly ironic that a merger cutting jobs and increasing capital concentration (banking sector) would be viewed more favorably due to an expanding share count

This discussion topic has also been picked up by Mr Tako Escapes who elaborates more skillfully than I.  I don’t dispute two points here, 1) Companies tend to have poor judgement in the timing of these transactions (buy high) and 2) the dollar amounts being expended.  But a dose of reality has to exist as well, I mean – realistically how many capex dollars should be spent to further the worldwide glut of steel (as one example)?

At least this exercise has been interesting but to draw any real conclusions requires a larger sample size.  More questions will also arise such as, ‘Are buybacks more prevalent in the overall S&P universe moreso than the DGI slice?’ or ‘Is my portfolio a large enough sample to be reflective of the stats bandied about by the Democratic candidates?’.  As usual in this blog, more questions than answers. I intend to complete this exercise for all of my holdings during the year

Other concepts will likely hit the garbage heap prior to getting much traction including a wealth tax (constitutional issues) and Modern Monetary Policy (hyperinflation).  As an aside, these concerns, per David McWilliams piece entitled Quantitative easing was the father of millennial socialism as presented by Ben Carlson makes for an interesting case. It certainly appears that the 2020 election season is off to a rousing start. Bottom line, I suspect some candidates will use this issue as a cry to rally the base with minimal substance to follow – similar in many ways to “Build the Wall” of yesteryear.  A reflection of what little has been learned over the last two years. In my mind not an investable theory.  

As always, opinions are welcome!

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Stock Buybacks?

As we round the corner coming into the final week of this month, the markets are showing a robustness that is probably more of a relief with abating trade tensions as the broader market was more a mixed bag with earnings reports. Case in point being my ongoing saga with Owens & Minor which announced their second dividend cut. At least they aren’t facing a SEC investigation à la Kraft Heinz. The common denominator in these two cases appear to be – at least in part – a laser focus on trimming costs with too much emphasis on the salary component.

Which leads to this week’s topic prompted by a private message which read in part: “… (I listen to) Pitchfork Economics with Nick Hanauer … (which) talked about stock buybacks and shareholder value maximization… I was hoping you could listen to it and let me know if everything they talk about holds up, or if there are pieces of the puzzle missing that might have been left out to steer a narrative. I don’t know what I don’t know and I don’t like thinking I might be getting misled.

First half the battle is acknowledging a gap in understanding. Most of us only begin to realize this too late in life choosing to muddle through as best we can. Second, keep in mind the quote, “99 percent of all statistics only tell 49 percent of the story.” Ron DeLegge II

For my uninitiated readers, this podcast is targeted to the rising generational groups such as Millennials, Gen-Z etc. with a slight Socialistic slant. The New Green Deal (which I’m currently researching) resides in this category as well – (but with a twist). Anyway, there are three schools of thought to stock buybacks; they are good, they are evil or they’re neither. The podcast presents them as generally bad, the current administration treats them as good (no choice here as they were spurred on as a by-product of the tax plan). My personal view is under current law – particularly when the Supreme Court of the United States has granted to corporations the notion of “corporate personhood” – they are generally neither. I’m more of a guy that tries to eke out a profit regardless of the rules, knowing they will likely change at a future date and adjustments will be required.

Major Issues with the Podcast

  • 11:44 – “Secondary offerings aren’t all that important”
    • Depends on the type – if the secondary creates more shares to fund a new production line for instance, why would there be a penalty for a return to the original share count?
  • 18:30 – 90% of corporate profits are returned to the richest people via dividends and stock buybacks.
    • Wells Fargo is 62% owned by institutions and the number is about 15% for Walmart. Generally this reflects ETFs and mutual funds which are largely owned by individuals.
  • 16:00 – shareowners are not investors.
    21:07 – … buying stock is speculating not investing .
    23:01 –  … if you think shareholders are investors … that contributes to the growing economic inequality
    • Only in the narrowest of definitions (buying an initial issuance or direct from a company’s secondary) is this true. Even as “traders” an economic interest with ownership rights is gained with the price (implied value) the speculation.
  • 26:49 – chartered corporations existed to better society and for a limited time.
    • These types of corporate structures were modified (initially in NC-1795) to circumvent perceived constitutional limitations on enforcement of multi-state investments (canals, railroads). They maintained a societal purpose including eminent domain rights (conversely, eminent domain is a New Green Deal issue as well).
  • 33:32    – Wells Fargo … laid off employees while (enriching owners through buybacks).
    • The layoffs were due primarily to exiting business lines in an effort to refocus on core operations reducing (in theory) the ongoing capability for malfeasance.  Also to reduce overlapping operations (footprint acquired through acquisitions). It was not related to buybacks. In fact, Warren Buffett, the largest shareholder is precluded from owning greater than 10%.  He is required to sell when buybacks are performed resulting in no short term enrichment.

The one point I hadn’t really considered in this debate was their point at 40:08 of a possible prohibition of buybacks if employees are receiving public assistance. I would add underfunded pensions and Sen. Marco Rubio’s (R-FL) position of taxing buybacks like dividends to the mix of potential areas to improve. One area requiring caution is the treatment of large private companies versus public ones. Examples that initially come to mind are Hobby Lobby, Cargill, Chick-fil-A and Koch Industries. None of the Democratic challengers has yet presented (in my opinion) a viable solution to improve the status quo without discriminating against any current stakeholder thereby cheapening their argument regarding equality.

So, while appreciating the question, my response is probably clear a mud as this issue is a tangled web with no clear right or wrong answer. Only that your instincts are correct in attempting to discern all the arguments to formulate your own opinion. My guess is this rebuttal does not fully address all the issues either – but my 2¢!

Any thoughts, opinions or other considerations that you have?