While Other Investors Flee, One Group Is Buying

[Parsad]

Interesting how retail investors are shunning stocks, while we are at near historic highs for corporate share buybacks.  Cheers!

 

http://www.cnbc.com/id/45402485

[bmichaud]

http://www.bloomberg.com/news/2011-08-11/buybacks-headed-for-third-biggest-year-as-s-p-500-plunges-valuations-fall.html#

 

U.S. companies are authorizing share repurchase plans at a rate that may make 2011 the third biggest year for buybacks since at least 1985, according to Birinyi Associates Inc.

 

There were $36 billion in repurchases approved last month, bringing the total this year to $324 billion, Rob Leiphart, an analyst at the Westport, Connecticut-based research firm, wrote in a note today. Should the rate hold up, 2011 would end with $554 billion. Only 2006 and 2007 had more, with $655 billion and $863 billion authorized, Birinyi data show.

 

 

Corporate America is not exactly a capital allocation stalwart when it comes to valuing its own stock. If they were operating under shareholder-friendly principles, they would be distributing record cash levels in the form of special dividends at these levels and buying back stock at lower levels. Or better yet, stockpile (no pun intended) cash at high stock prices and buyback at low prices (the more tax-efficient practice).

[moore_capital54]

Bmichaud how can you say they are not buying at low prices? CSCO is buying back its shares at ridiculously low prices, averaged under $16 last quarter...

 

How do you know stocks are going to decline to "lower levels"?

 

Seems to me buying back stock here is a much more efficient way of allocating capital then distributing a dividend...

 

 

[Ballinvarosig Investors]

Bmichaud how can you say they are not buying at low prices? CSCO is buying back its shares at ridiculously low prices, averaged under $16 last quarter...

 

How do you know stocks are going to decline to "lower levels"?

 

Seems to me buying back stock here is a much more efficient way of allocating capital then distributing a dividend...

Bmichaud hasn't said anything about whether stocks are cheap or expensive. He has merely shown that the scale of share buyback's isn't necessarily an indication that the market is cheap.

[BargainValueHunter]

I wish there was a way to rank companies by their abilities to buy ALL of their outstanding shares with cash on hand and long term debt at these historically low rates.

 

I don't understand why certain companies just don't buy back 50% or more of their outstanding shares.

 

Apple could start a Berkshire-style investment portfolio with $50 BILLION dollars and have plenty of cash left over to collect dust.

[moore_capital54]

I am sorry did we read different posts?

 

"Corporate America is not exactly a capital allocation stalwart when it comes to valuing its own stock. If they were operating under shareholder-friendly principles, they would be distributing record cash levels in the form of special dividends at these levels and buying back stock at lower levels. Or better yet, stockpile (no pun intended) cash at high stock prices and buyback at low prices (the more tax-efficient practice)."

 

The way I read he is essentially saying that he is smart enough to know that at this point in the cycle, corporate america shouldn't be buying back stocks yet (wait for them to reach lower levels) and instead pay a special dividend.

[bmichaud]

Bmichaud how can you say they are not buying at low prices? CSCO is buying back its shares at ridiculously low prices, averaged under $16 last quarter...

 

CSCO, YHOO, HPQ (if it were to continue), IRM, BP (really, really wish they would), PEP, MSFT, are all very attractive buyback candidates, whereas companies such as COH, UTX, CAT, DE, XOM, CVX, OXY, TJX, are not given that they are near cyclical highs.

 

My only point in highlighting that article is that corporate America, as a whole, is not the most efficient capital allocator of all time as evidenced by the high positive correlation between buyback programs and S&P 500 stock prices (i.e. large programs when stocks are high, and small programs when stocks are low). I do not at all agree with XOM, for example, buying back stock no matter what the price is. Nucor is very shareholder friendly - they issued stock near its peak back in 2007 I believe, in order to raise cash for the oncoming recession.

[bmichaud]

I am sorry did we read different posts?

 

"Corporate America is not exactly a capital allocation stalwart when it comes to valuing its own stock. If they were operating under shareholder-friendly principles, they would be distributing record cash levels in the form of special dividends at these levels and buying back stock at lower levels. Or better yet, stockpile (no pun intended) cash at high stock prices and buyback at low prices (the more tax-efficient practice)."

 

The way I read he is essentially saying that he is smart enough to know that at this point in the cycle, corporate america shouldn't be buying back stocks yet (wait for them to reach lower levels) and instead pay a special dividend.

 

 

Sorry I don't have the chart, but Moore you must have seen at some point in your career a chart of record high buyback programs at market peaks, and record low buyback programs at market lows.

 

I am not smart enough to know the correct TIMING of when to buy stuff - what I believe I am smart enough to know is the correct VALUE of where to buy stuff. I like to adhere to the following....time an investment or value an investment, don't try to do both.

 

If one looks at the long-term valuation of corporate America on a cyclically-adjusted PE basis, one can reasonably conclude stocks, as a whole, are not a screaming buy here. IMO, the fact that corporate America is buying back stock in droves right now is actually confirmation that stocks are not a screaming buy considering corporate America's prior track record of buying back stock.

[moore_capital54]

I have seen that chart.

 

But as you say in your last post you have to look at it on a case by case basis. For the most part, the ones that are buying back shares and that I am following are doing so at what I deem to be attractive valuations.

 

We are in the eye of the storm, I have no doubt about that.

 

 

[bmichaud]

But as you say in your last post you have to look at it on a case by case basis. For the most part, the ones that are buying back shares and that I am following are doing so at what I deem to be attractive valuations.

 

Agreed. I'm a huge fan of BBs well under conservatively-calculated intrinsic values.

[twacowfca]

The problem with attaching significance to aggregate share buybacks is that buybacks tend to follow market values mainly to prevent dilution from issuance of new shares, particularly to cover options and restricted stock schemes.  The net effect of aggregate share repurchases on number of shares outstanding is about zero, although a small percentage of companies buy low and sell high intelligently.  :)

[Valuebo]

Good discussion and I agree with all that has been said. Although corporate America on average is bad at allocating capital efficiently, I think a lot of them are doing one hell of a deal in the current market.

 

Take DELL for example. While revenue is flat and the market gives it zero love (like with many others), these are the facts: $25.6b market cap, $16b in cash and investments, $4.5-5b in operating income, low debt, no significant share dilution, ... They repurchased $2.2b in shares already this year and will have bought back around 10% of outstanding shares by the end of this year. They still have $6-6.5b left in their program and a long term owner can only hope current prices last a little longer. Eventually this will show significantly in per share data.  8)

[Parsad]

Good discussion and I agree with all that has been said. Although corporate America on average is bad at allocating capital efficiently, I think a lot of them are doing one hell of a deal in the current market.

 

Take DELL for example. While revenue is flat and the market gives it zero love (like with many others), these are the facts: $25.6b market cap, $16b in cash and investments, $4.5-5b in operating income, low debt, no significant share dilution, ... They repurchased $2.2b in shares already this year and will have bought back around 10% of outstanding shares by the end of this year. They still have $6-6.5b left in their program and a long term owner can only hope current prices last a little longer. Eventually this will show significantly in per share data.  8)

 

Perhaps, but Eddie Lampert was buying back Sears Holding shares in the high $100's for some time, and it has not improved the business' economics or earnings per share one iota years later.  He would have been better off not listening to shareholders and just holding the cash until large opportunities came his way.  That patience is what is missing from most corporate CEO's because shareholders get antsy.  Cheers!

[Valuebo]

Good discussion and I agree with all that has been said. Although corporate America on average is bad at allocating capital efficiently, I think a lot of them are doing one hell of a deal in the current market.

 

Take DELL for example. While revenue is flat and the market gives it zero love (like with many others), these are the facts: $25.6b market cap, $16b in cash and investments, $4.5-5b in operating income, low debt, no significant share dilution, ... They repurchased $2.2b in shares already this year and will have bought back around 10% of outstanding shares by the end of this year. They still have $6-6.5b left in their program and a long term owner can only hope current prices last a little longer. Eventually this will show significantly in per share data.  8)

 

Perhaps, but Eddie Lampert was buying back Sears Holding shares in the high $100's for some time, and it has not improved the business' economics or earnings per share one iota years later.  He would have been better off not listening to shareholders and just holding the cash until large opportunities came his way.  That patience is what is missing from most corporate CEO's because shareholders get antsy.  Cheers!

 

I don't know anything of significance about Sears Holding so I can't comment there.

 

What would you suggest Dell does with $16b in cash & investments (would be $18b+ without buybacks from this year. Even more if you at the last few years) if they can't find an opportunity? A dividend? At these valuations share buybacks just seem more tax efficient to me. They are only deploying what is coming in and the pile of cash stays about the same. If needed there will still be plenty of cash left for an opportunity (that may never come?).

 

If I'm correct you have a position in MSFT. Do you agree with their buybacks? Just to get an idea of where you are at.

[Parsad]

I don't know anything of significance about Sears Holding so I can't comment there.

 

What would you suggest Dell does with $16b in cash & investments (would be $18b+ without buybacks from this year. Even more if you at the last few years) if they can't find an opportunity? A dividend? At these valuations share buybacks just seem more tax efficient to me. They are only deploying what is coming in and the pile of cash stays about the same. If needed there will still be plenty of cash left for an opportunity (that may never come?).

 

If I'm correct you have a position in MSFT. Do you agree with their buybacks? Just to get an idea of where you are at.

 

I'm one of the few guys who thinks that if the corporate CEO doesn't have alot of opportunities in their own niche, and they seem like reasonably smart guys, then they should look at buying other businesses.  You allocate the capital to where it generates the greatest return. 

 

But that would be too sensible a thing to do, and most boards and shareholders would scoff at the idea.  Instead they want to issue tax inefficient dividends or share buybacks when the discount in the price isn't adequate.  Well, we don't want them throwing money at just anything, and if they can't find anything better, they should just buy back their own company's shares...goes the argument.  Not my cup of tea!  Cheers!

[Hoodlum]

Here is another interesting case for buybacks.

 

Gates’ Selling Seen Sparking $2 Bil MSFT Buying Spree By Index Funds

 

Since the S&P 500 is a float-weighted index — it only uses shares freely trading in public hands — Gates’s holdings lower Microsoft’s place in the index.

 

Once insiders control less than 10% of a company’s shares, S&P adjusts the S&P 500 to count every share. If that happens for Microsoft, index mutual funds and ETFs will need to buy additional Microsoft shares, says Rawson. S&P currently covers about 89% of MSFT’s 8.4 billion shares when calculating its index.

 

“If all of a sudden we count all 8.4 billion when we do the adjustment next year it’s going to mean a 14% increase in its weighting,” Howard Silverblatt, senior index analyst for S&P, told Jones. Index investors would have to acquire an additional 1% of all Microsoft shares to match its weighting in the index.

 

Gates’s current rate of stock sales could reduce insider holdings below 10% early next year. S&P recalibrates its index annually in September.

 

 

[Valuebo]

I don't know anything of significance about Sears Holding so I can't comment there.

 

What would you suggest Dell does with $16b in cash & investments (would be $18b+ without buybacks from this year. Even more if you at the last few years) if they can't find an opportunity? A dividend? At these valuations share buybacks just seem more tax efficient to me. They are only deploying what is coming in and the pile of cash stays about the same. If needed there will still be plenty of cash left for an opportunity (that may never come?).

 

If I'm correct you have a position in MSFT. Do you agree with their buybacks? Just to get an idea of where you are at.

 

I'm one of the few guys who thinks that if the corporate CEO doesn't have alot of opportunities in their own niche, and they seem like reasonably smart guys, then they should look at buying other businesses.  You allocate the capital to where it generates the greatest return. 

 

But that would be too sensible a thing to do, and most boards and shareholders would scoff at the idea.  Instead they want to issue tax inefficient dividends or share buybacks when the discount in the price isn't adequate.  Well, we don't want them throwing money at just anything, and if they can't find anything better, they should just buy back their own company's shares...goes the argument.  Not my cup of tea!  Cheers!

 

Wouldn't that imply diworsification for the company?

 

In the case of Dell, it is already in storage, services, service & networking, software, mobility and desktop PC's and sells all of that to Large enterprises, SME's, government and consumers. Seems like adding even more would only detoriate margins that are being built up right now or would make the company lose focus on what it is doing best. How is it not agreeable then to simply invest excess capital in your own company at such valuations.

 

Am I missing something obvious here? Let me know, I appreciate the replies a lot!  :)

[Liberty]

Wouldn't that imply diworsification for the company?

 

In the case of Dell, it is already in storage, services, service & networking, software, mobility and desktop PC's and sells all of that to Large enterprises, SME's, government and consumers. Seems like adding even more would only detoriate margins that are being built up right now or would make the company lose focus on what it is doing best. How is it not agreeable then to simply invest excess capital in your own company at such valuations.

 

Am I missing something obvious here? Let me know, I appreciate the replies a lot!  :)

 

It would be entirely dependent on what they decide to add. The question is more: Is management capable of recognizing good businesses with durable competitive advantages and acquiring them at good prices. Most managements can't do that, and so it ends up being diworsification.

 

It's the difference between Buffett adding varied businesses to Berkshire, and Coca-Cola going into the movie business or whatever they did back in the day...

[Valuebo]

Wouldn't that imply diworsification for the company?

 

In the case of Dell, it is already in storage, services, service & networking, software, mobility and desktop PC's and sells all of that to Large enterprises, SME's, government and consumers. Seems like adding even more would only detoriate margins that are being built up right now or would make the company lose focus on what it is doing best. How is it not agreeable then to simply invest excess capital in your own company at such valuations.

 

Am I missing something obvious here? Let me know, I appreciate the replies a lot!  :)

 

It would be entirely dependent on what they decide to add. The question is more: Is management capable of recognizing good businesses with durable competitive advantages and acquiring them at good prices. Most managements can't do that, and so it ends up being diworsification.

 

It's the difference between Buffett adding varied businesses to Berkshire, and Coca-Cola going into the movie business or whatever they did back in the day...

 

I agree, of course. 

 

(In this particular case I would like to give M. Dell the benefit of the doubt. He has been doing smart acquisitions in the past and has grown this business from scratch, now reinventing it step by step since he came back. Disclosure: No position atm.)

[Parsad]

Wouldn't that imply diworsification for the company?

 

In the case of Dell, it is already in storage, services, service & networking, software, mobility and desktop PC's and sells all of that to Large enterprises, SME's, government and consumers. Seems like adding even more would only detoriate margins that are being built up right now or would make the company lose focus on what it is doing best. How is it not agreeable then to simply invest excess capital in your own company at such valuations.

 

Am I missing something obvious here? Let me know, I appreciate the replies a lot!

 

No, that's usually the excuse boards and shareholders use, because there are plenty of examples of good companies buying shrimp farming businesses...think Coca-cola!  But the ultimate job of any CEO is to generate the best returns possible for shareholders by managing the business soundly, ethically and honestly.  No where in that mandate does it say they cannot enter other lines of business.  Look at what Markel is doing, or Fairfax...or how about Marmon, the Tisch Family, etc. 

 

Eventually, large scale businesses like Dell or Microsoft are going to either run out of options, or run into brick walls in regards to their own niche.  So either you buy back shares, pay a dividend, enter new lines of business or allocate capital into totally different industries where you have a much better return on invested capital.  All those optiions should be considered, and capital allocated to where the best risk/reward comes from...not simply fall back on share buybacks and dividends.  Cheers!

[Valuebo]

 

No, that's usually the excuse boards and shareholders use, because there are plenty of examples of good companies buying shrimp farming businesses...think Coca-cola!  But the ultimate job of any CEO is to generate the best returns possible for shareholders by managing the business soundly, ethically and honestly.  No where in that mandate does it say they cannot enter other lines of business.  Look at what Markel is doing, or Fairfax...or how about Marmon, the Tisch Family, etc. 

 

Eventually, large scale businesses like Dell or Microsoft are going to either run out of options, or run into brick walls in regards to their own niche.  So either you buy back shares, pay a dividend, enter new lines of business or allocate capital into totally different industries where you have a much better return on invested capital.  All those optiions should be considered, and capital allocated to where the best risk/reward comes from...not simply fall back on share buybacks and dividends.  Cheers!

 

Yes, all options should be considered and capital should be allocated to where the best risk/reward comes from. You simply can't disagree with this logic, makes perfect sense. Sadly however, this isn't a perfect world filled with Buffett's & co and I really questions wether most management teams are capable of correctly estimating the risk/reward profile in stuff they have no or little experience in.

 

I really agree with what you are saying, I just don't think it is realistic to ask that of average management and expect to get the best possible return if we are talking about acquisitions in new territory. Most of the time, in this regard it seems management tends to underestimate involved risk and overestimates its skills and abilities.

 

 

[jeffmori7]

So Parsad, what would you do if you were Apple today with an enormous 80B cash hoard? Buyback (at cheap evaluation now) or initiate a dividend? Or if I follow your thoughts, Apple should hire some competent asset managers and do à la Markel, Fairfax, Berkshire and invest its pile of cash into any investment even outside its core competency?

 

For a company like Apple or Dell, I think the first thing they want is to invest into their own company, but they are not even able tu put enough cash to work into their own company so they have to look outside? Microsoft should do the same probably..I agree with you, sometimes maybe it makes more sense then to buy any technological startup or competitors but this is natural that it is not their first idea.

[Cardboard]

I think that Microsoft will take care of a good chunk of its cash pile in short order. Apparently, bids have been requested for next week for Yahoo by its advisors and they apparently signed an NDA with Yahoo which they originally did not want to. In any case, Yahoo has to get going since Dan Loeb will likely offer his own slate of directors and the deadline is January 7.

 

When I look at this, I would certainly prefer MSFT buying back its shares than something like Yahoo. Even a special dividend factoring in the tax implications remains a better option. Of course Yahoo, may turn out like a good deal, but the risks of: execution, monetizing or using patents and what to do with Yahoo Japan and the stake in Alibaba are very large IMO.

 

Cardboard

[Valuebo]

 

When I look at this, I would certainly prefer MSFT buying back its shares than something like Yahoo. Even a special dividend factoring in the tax implications remains a better option. Of course Yahoo, may turn out like a good deal, but the risks of: execution, monetizing or using patents and what to do with Yahoo Japan and the stake in Alibaba are very large IMO.

 

Cardboard

 

My feelings exactly. And knowing that this business should still be in their line of competence... I really don't want to know what different things could possibly go wrong if they bought a "shrimp farming business". This is Balmer, not Buffett. :x