Tag Archives: Buybacks

“Folly For The Ages”: After Buying Back 63 Million Shares At $83, Hess Just Sold 25 Million Shares At $39, by Tyler Durden

Posted on February 7, 2016 | Leave a comment

By the way, Hess’s CEO, John B. Hess, has an undergraduate degree and an MBA from Harvard. From Tyler Durden at zerohedge.com:

Having long mocked the sheer idiocy of using organic cash or worse, debt proceeds, to fund buybacks just so management can eek out a few more million in equity-linked compensation while activists enjoy a few extra points in P&L on the back of naive bondholders managing ‘other people’s money’, we were delighted to see the buyback bubble begin to burst in the middle of 2015 starting with Michael Kors (as detailed in “When Stock Buybacks Go Horribly Wrong”) and Monsanto (“When Buybacks Fail…”), when each respective stock plunged far below the average buyback price.

But nothing compares to what Hess did yesterday.

A quick recap: back in 2013, when it was trading at a discount to its peers, Hess became the target of an activist campaign led by Paul Singer’s Elliott Management who demanded a quick boost in the stock price, as a result of which the energy producer decided to exit its refining business (arguably the only line of business that would have benefited from the current depressed oil price) while not only raising its dividend but also authorizing a $4 billion share buyback.

The company then boosted its buyback further with proceeds from the sale of its retail gas stations (for $2.9 billion) while growing its debt by $1 billion from 2013 to 2015, leading to the repurchase of a total of 62.7 million shares through the end of 2014 at an average price of $83.

The stock price reacted as expected: it soared past $100 from below $60 before Elliott turned up. It then continued to spend more billions under additional buyback all the way through the third quarter of 2015, which however took place just as the worst oil downturn in history was taking place. The full history of Hess’ stock buybacks is shown below.

And then the stock crashed, as investors finally realized that plunging oil, sliding cash flow and surging debt meant the company found itself in a life and death fight for survival.

Which brings us to yesterday, when in an attempt to shore up liquidity and avoid halting its dividend, Hess sold 25 million shares at a price of $39/share: a 10% discount to the prior closing price.

As Reuters puts it, the “Hess folly is one for the ages.”

To continue reading: “Folly For The Ages”

 

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Macy’s Massacre – 3 Years Of Wasted Buybacks Ends Financial Engineering Dreams, by Tyler Durden

Posted on November 12, 2015 | Leave a comment

Maybe all those buybacks weren’t such a good idea after all. On a long enough time line, shareholder friendly can be very shareholder unfriendly, when cash is returned to shareholders and not reinvested in the business. From Tyler Durden at zerohedge.com:

Macy’s is down over 13% today, pushing towards a sub-$40 handle – the lowest since February 2013 – after lowering guidance and disappointing a market full of hope (and hype) that retail is back (remember, all the retail hiring last Friday). However, that is not the most prescient issue as 3 years of buying back billions of dollars of Macy’s stocks – to financially-engineer earnings to ensure executive compensation is satisfactory – have been completely wasted. And worst still, the additional debt added to fund the total failure in timing of buybacks has now sent Macy’s credit spiking to multi-year highs (as the stock tumbles).

“No Brainer” – Macy’s actually increased their buyback pace last quarter alone – spending $900 million on stock at an average price of $53.89, a loss of $230 million of that “investment”

And the flipside of shareholder-friendly releveraging… spiking default risk…

Now what? This is the clear message that executives in every credit cycle – there is a limit to the largesse with which you can abuse bondholders in the name of levitating share prices amid a dismal reality.

To continue reading: Macy’s Massacre

See also: Macy’s Blames “Tepid Spending” On Revenue Miss: Same Store Sales Tumble; Slashes Guidance, by Tyler Durden, SLL, 11/11/15

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Wrath of Financial Engineering: It’s Now Eating into Earnings, by Wolf Richter

Posted on October 16, 2015 | Leave a comment

Companies are borrowing record amounts of money just as their revenues are falling and the economy looking like its heading into recession. Most of that borrowed money isn’t for capital expenditures, it’s for financial engineering, which amounts to financial speculation. Conceivably interest rates could rise, too, but what’s the worry? From Wolf Richter at wolfstreet.com:

Companies with investment-grade credit ratings – the cream-of-the-crop “high-grade” corporate borrowers – have gorged on borrowed money at super-low interest rates over the past few years, as monetary policies put investors into trance. And interest on that mountain of debt, which grew another 4% in the second quarter, is now eating their earnings like never before.

These companies – according to JPMorgan analysts cited by Bloomberg – have incurred $119 billion in interest expense over the 12 months through the second quarter. The most ever.

With impeccable timing: for S&P 500 companies, revenues have been in a recession all year, and the last thing companies need now is higher expenses.

Risks are piling up too: according to Bloomberg, companies’ ability pay these interest expenses, as measured by the interest coverage ratio, dropped to the lowest level since 2009.

Companies also have to refinance that debt when it comes due. If they can’t, they’ll end up going through what their beaten-down brethren in the energy and mining sectors are undergoing right now: reshuffling assets and debts, some of it in bankruptcy court.

But high-grade borrowers can always borrow – as long as they remain “high-grade.” And for years, they were on the gravy train riding toward ever lower interest rates: they could replace old higher-interest debt with new lower-interest debt. But now the bonanza is ending. Bloomberg:

As recently as 2012, companies were refinancing at interest rates that were 0.83 percentage point cheaper than the rates on the debt they were replacing, JPMorgan analysts said. That gap narrowed to 0.26 percentage point last year, even without a rise in interest rates, because the average coupon on newly issued debt increased.

And the benefits of refinancing at lower rates are dwindling further:

Companies saved a mere 0.21 percentage point in the second quarter on refinancings as investors demanded average yields of 3.12 percent to own high-grade corporate debt – about half a percentage point more than the post-crisis low in May 2013.

That was in the second quarter. Since then, conditions have worsened. Moody’s Aaa Corporate Bond Yield index, which tracks the highest-rated borrowers, was at 3.29% in early February. In July last year, it was even lower for a few moments. So refinancing old debt at these super-low interest rates was a deal. But last week, the index was over 4%. It currently sits at 3.93%. And the benefits of refinancing at ever lower yields are disappearing fast.

What’s left is a record amount of debt, generating a record amount of interest expense, even at these still very low yields.

To continue reading: Wrath of Financial Engineering

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While We Sleep, Corporate Execs Strip-Mine America, by Fabius Maximus

Posted on October 8, 2015 | Leave a comment

From the editor of Fabius Maximus, a multi-author website with a focus on geopolitics:

Nothing shows how America’s reins are held by the 1% than our out-of-control corporations, enriching their executives at the cost of the future of their businesses — and ours. Here’s another status report on this sad but fixable story.

The Q2 Buybacks Report by FactSet is, as usual, sobering reading. During the 12 months ending in June, companies in the S&P 500 spent $555.5 billion repurchasing their shares. For the first time since October 2009, buybacks exceeded free cash flow (cash flow after capex); they’re borrowing to buy back shares.

For the past two years buybacks have run at the fantastic rate of about $120 billion per quarter — the same rate as in 2006-2007, with tech companies the leaders. In 2014 they spent 95% of their profits on buybacks and dividends (building the future is somebody else’s problem in corporate America).

Investors applaud this as a boost to share prices. Surprising to the naive, a decade of buybacks has reduced the S&P 500’s share count by only 2%. Share buybacks are one part of the triangle trade that transfers vast fortunes from shareholders to senior executives using stock options:

• executives exercise their options when shares rise (i.e., the company sells shares to executives at a discount to current prices),
• the executive sells those shares to the public,
• the company buys back those shares from the public.

Net result: the company has less money, their executives have more, the share count is unchanged.

To continue reading: While We Sleep, Corporate Execs Strip-Mine America

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Why Stocks Are Sliding: For The First Time Since 2009 Spending On Buybacks Surpasses Free Cash Flow, by Tyler Durden

Posted on September 23, 2015 | 1 comment

Don’t look now, but the US stock market’s biggest buyers of stocks are losing their wherewithal and consequently, must reluctantly pull away from the market. From Tyler Durden at zerohedge.com:

Back in early 2014, we first explained how it was possible that with the Fed’s QE tapering, the S&P kept rising higher despite declining intervention by the Fed in capital markets: the answer was corporate buybacks, which had then soared to the highest level in history.

This artificial stock-support by CFOs and Treasurers only increased in the subsequent year, with buyback announcements hitting a record high one year later, in May 2015, as also profiled previously.

Then after the early euphoria of 2015, repurchase activity slowed down. As Factset observes in its just released quarterly buyback report, the dollar-value of share repurchases amounted to $134.4 billion over the second quarter (July), which represented a 6.9% decline from the first quarter (April) and a 0.4% decline year-over-year. On a trailing twelve-month basis (TTM), dollar-value share repurchases totaled $555.5 billion, which was approximately flat with the first quarter.

On the surface, this is good news, but, and here there is a huge “but”… because the reason for the drop off in buybacks has nothing to do with corporate executives reigning in their desires for higher stock prices and thus, higher equity-linked compensation, and everything to do with funding limits. Because while buyback activity may be slowing down it is only due to one thing: a collapse in free cash flow among S&P500 companies, with energy companies at the forefront, but increasingly all sectors being hit by a dramatic slow down in FCF creation. According to Factset while LTM buybacks declined by 1.3%, Free Cash Flow over the same period plunged by a whopping 29%!

To continue reading: Spending On Buybacks Surpasses Free Cash Flow

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He Said That? 6/4/15

Posted on June 4, 2015 | 4 comments

One of these days it would be fun to write a treatise on economics. It probably wouldn’t need to be any longer than 50 pages; just leave out the mountains of garbage masquerading as knowledge in contemporary economic theory and concentrate on the few straightforward, analytically powerful economic postulates that time and time again have demonstrated their real-world utility. SLL has commented on corporate share buybacks and dividend payouts, most recently in “Cat Food Dinners,” 5/15/22. The blogosphere and even the MSM have taken note, but there has been little connecting of dots. Here is a representative take from Rick Rieder of asset manager BlackRock:

Now, there is nothing wrong with stock buybacks and dividends per se, and indeed they can contribute to a very sensible corporate capital allocation strategy. But should this use of capital crowd out long-term capital expenditure (investment) in a firm’s core business, or begin to threaten its credit quality, then it can become concerning. And this is what we are seeing today.

http://davidstockmanscontracorner.com/55312/

The statement fails to note the main driver behind buybacks and dividends: ultra-low interest rates. Corporations are returning money to shareholders because after six years of QE and interest rate repression, the expected return on productive investment has equilibrated with the ultra-low cost of funds. Buybacks and dividends are not crowding out productive investment. The world is drowning in productive investment, funded by cheap debt, and consequently gluts in all sorts of goods and services overhang the global economy. The oil patch is Exhibit A, but there are plenty of others. Corporations are returning money because they can’t find anything better to do with it. Since shareholders and equity markets seem to like it, some of them are even borrowing at ultra-low rates and channelling borrowed money back to shareholders. Of course, the buybacks are coming at what SLL believes is very close to the top of the equity market, so the corporations are assuming equity market risk (see “When Stock Buybacks Go Horribly Wrong,” SLL, 5/28/15), but hasn’t that been the point of central bank policy the last six years: to force us all to become equity market risk-takers?

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When Stock Buybacks Go Horribly Wrong, by Tyler Durden

Posted on May 28, 2015 | 1 comment

SLL has its qualms about stock buybacks (see “Cat Food Dinners,” SLL, 5/22/15), especially six years into a bull market. Here’s what can go wrong, from Tyler Durden at zerohedge.com:

When companies have a burning need to boost their stock price and/or have no organic growth opportunities requiring fresh investment, they do one thing: engage in stock buybacks (usually funded with recently issued bonds). We first warned about the dangers of such a “strategy” in 2012, and most recently, earlier today the WSJ once again noted that “U.S. Firms Spend More on Buybacks Than Factories.”

The reality is that stock buybacks are great… as long as the stock price keeps rising. They are also great as long as the stock isn’t so illiquid that once the sole buyer withdraws, be it the company itself or its CEO (in the case of Hanergy using corporate funds) the stock crashes.

The real problem emerges when after sinking hundreds of millions, or more, in stock buybacks, the stock no longer keeps rising.

This is precisely what happened to KORS stock. As Dominique Dassault points out, earlier today Michael Kors reported abysmal earnings which have lobbed a whopping 23% off the stock price and the market cap of KORS just today.

But it was not KORS’ operational issues that were troubling: it is how much the company burned on stock buybacks. In KORS’ earnings release we read:

During the quarter, the Company repurchased 1,409,682 shares of the Company’s ordinary shares for approximately $92.0 million in open market transactions

This means in the quarter ended March 31, KORS spent $92 million supporting its stock ahead of what it knew would be an earnings debacle. It also means that its average purchase price was $65.3/share in Q4, or 40% higher than KORS’ last trade at $46.50.

But that’s not all. Last quarter, after authorizing $1.5 billion for stock repurchases, KORS reported the following:

During the quarter, the Company repurchased 5,068,813 shares of the Company’s ordinary shares for approximately $399.9 million.

In other words, KORS’ average price in Q3 was $78.9, a 70% premium to the current market price.

http://www.zerohedge.com/news/2015-05-27/when-stock-buybacks-go-horribly-wrong

To continue reading: When Stock Buybacks Go Horribly Wrong

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“Obsessive” Buybacks Could Be Big Mistake, “Serious” People Tell Unserious People, by Tyler Durden

Posted on April 24, 2015 | Leave a comment

The number one prop under the stock market has been corporations buying back their own stock, often at elevated valuations, often using borrowed money. SLL analyzed the phenomenon in “Peak Financial Engineering,” SLL, 4/14/15. Here’s another critical examination, from Tyler Durden, at zerohedge.com:

Over the course of the last several months we’ve taken every opportunity to point out the fact that undergirding the strength in equities is a wave of corporate buybacks. At nearly $350 billion, IG issuance recently hit a record for Q1 and HY supply hasn’t been too shabby either at $93 billion during the period. The supply deluge has of course been fueled by investors’ voracious appetite for anything that offers any semblance of yield in the face of a credit landscape where risk-free debt slides further into NIRP-dom with each passing month. Unfortunately, companies aren’t using the proceeds from debt sales to invest in future growth and productivity but are instead piling it all back into their own stocks, inflating both their shares and their bottom line and creating a false sense of corporate health. For more on this dynamic, see the following:

And The Biggest Buyer Of Stocks In 2015 Will Be…
Here Is The Reason Why Stocks Just Had Their Best Month Since October 2011
The Biggest Threat To The S&P 500 In The Next Month: “Biggest Buyer Of Stocks In 2015” Enters Blackout Period
Explaining US Stock And Bond Markets In 5 Easy Charts

And there are many, many more. Here are some visuals that illustrate the situation:

http://www.zerohedge.com/news/2015-04-23/obsessive-buybacks-could-be-big-mistake-serious-people-tell-unserious-people

To see the charts and continue reading: Buybacks

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