Elsewhere on this site, there is a news item about CSX paying $1.5 billion (that's billion, with a "b") to buy back it's own stock, the rationale being that there will be fewer shares of stock out there and that each one will be worth more money. That will force the stock price up. Here are my questions;
1) $1.5 billion is a lot of money being paid out. Does this pay-out not negatively impact the O.R.? Hasn't O.R. become the be-all-end-all for the the investors on Wall St.?
2) What happens to the voting rights of the shares being bought back? Do they just not get voted or can someone in managent vote them?
3) Is there a formula for computing what the new stock price will be after a given number of shares are bought back?
As always, thanks in advance for the replies.
1. Operating Ratio is measured prior to effects of the stock buyback it is a measure of operational efficiency.
2. Shares bought back are retured to the treasury of the company in effect the company is exchanging cash for shares of stock (the stock can be resold later in a few years). The net effect on the balance sheet should be neutral. The advantage of doing this is the company does not rack up a cash treasure chest that a corporate raider might find attractive in a future raid. The other advantage is to boost the price of the stock and reward investors in the company and it is treated as a form of dividend to investors. Though the presumption that a stock buy back always boosts the price of the stock is not always true. In some cases there is just too much outstanding stock and the buyback has almost no effect on value. Sometimes earnings start to fall and future expectations of earnings are seriously degraded and the stock buyback is used to initially hide the distress (heh).
3. Thats a hard one because future value of a share of stock is not 100% predicted on buy back but also is a function of future expected earnings. If expected earnings are on the decline then buybacks will not boost the stock as much as if expected earnings are on the increase. So it's really you that has to answer this question and determine what the expectation is of future earnings.....I suspect they are expected to decline and EHH is using this as camoflage but that is just me being negative on CSX as a former owner.
As a generalization a buy back generates a lower tax bill for the sellers than will a dividend. The total dividend amount will be taxable in almost all circumstances. However, in a buy back each seller will have a basis in the stock sold which is merely return of capital and not taxable.
In addition each seller can control the timing of the recognition of taxable income; no such timing is possible with a dividend.
A company interested in putting maximum cash in the hands of its stockholders instead of spliting cash paid out with the taxing authorities should be considering buy backs.
Why not put in 1.5 Billion in Capital improvements?
Considering that stock (of all sorts) trades hands on a regular basis, I'd think that short of an announcement such as this, the average stockholder would hardly notice.
In cases like this, does the company buying back simply pull shares from the open market as they become available, or do "I" get a letter in the mail asking for "my" shares?
Larry Resident Microferroequinologist (at least at my house) Everyone goes home; Safety begins with you My Opinion. Standard Disclaimers Apply. No Expiration Date Come ride the rails with me! There's one thing about humility - the moment you think you've got it, you've lost it...
tree68 Considering that stock (of all sorts) trades hands on a regular basis, I'd think that short of an announcement such as this, the average stockholder would hardly notice. In cases like this, does the company buying back simply pull shares from the open market as they become available, or do "I" get a letter in the mail asking for "my" shares?
Hunter Harrison's renumeration is no doubt linked to the performance of the stock. The more the stock price rises, the more his bonus increases.
A stock buy-back results in fewer shares outstanding, and the (same) earnings are now divisible by a smaller number of shares, resulting in the average earnings per share seeming to increase.
Even if earnings don't really increase, even if the entire railroad is in chaos, the stock price and earnings per share will rise slightly as a result of the buy-back, resulting in Harrison's bonus rising with it.
Who benefits? To some very small extent, the stockholders in the short run, but the chief beneficiaries are the executives and their bonuses.
In the past, companies such as Ford Motor or the Pennsylvania Railroad plowed their profits back into the company year after year in order to increase efficiency and profits. Andrew Carnegie was famous for doing this and angered some large stock holders who wanted that money for their dividends, instead.
Wall Street isn't fooled for long by accounting tricks such as buy-backs. This will work to the advantage of only a very few people (guess who?) at the very top, and will not at all serve investors, employees, or the public service.
CandOforprogress2 Why not put in 1.5 Billion in Capital improvements?
Whether the company has any potential capital improvements that would generate as high a return as the stock-buy-back is the relevant question.
CSX has financial planners who use a variety of sophisticated mathematical tools to help executive management decide what financial options, i.e. stock-buy-back vs. capital investments, will produce the optimum return for the corporation over a definable period.
Rio Grande Valley, CFI,CFII
NKP guy Hunter Harrison's renumeration is no doubt linked to the performance of the stock. The more the stock price rises, the more his bonus increases. A stock buy-back results in fewer shares outstanding, and the (same) earnings are now divisible by a smaller number of shares, resulting in the average earnings per share seeming to increase. Even if earnings don't really increase, even if the entire railroad is in chaos, the stock price and earnings per share will rise slightly as a result of the buy-back, resulting in Harrison's bonus rising with it. Who benefits? To some very small extent, the stockholders in the short run, but the chief beneficiaries are the executives and their bonuses.
We can do a bit better than NKP's post, portions above.
As to paragraph 1, it is common for executive compensation to include stock options, which become more valuable as stock price per share increases. EHH compensation is public information so you can look it up and see if NKP's claim is true. I did not bother.
Paragraph 2 is almost true. If earnings are stable and number of shares outstanding decreases, then earnings per share WILL increase. It is basic division.
As of today CSX has 900 million shares in the hands of the public. At current market price of $52, CSX will be able to buy back 28.8 million shares, or 3.2% of the stock, which will increase EPS of $1.94 to $2.00 over the some months period of the buy back. At current Price/Earnings ratio of just under 30, taken at 30, that should increase share price by $1.80. The problem is that the EPS varies over time as does the P/E ratio, and each is affected by dozens of factors each moving this way and that way over time. The practical point is that you can not see the theoretical result in the data. Paragraph 3, that stock price WILL rise is incorrect. It may, but many other factors affect the actual stock price on any given day and over the long term.
As to paragraph 4, who benefits, buybacks have long been a feature of business in general, including the railroads, so EHH did not invent this infernal scheme. Shareholders seem to like it since, in theory, it lets them cash out at a higher rate than would otherwise be possible. Management whose compensation is related to stock price like it if it works, meaning nothing bad happens to depress earnings and the P/E ratio. The problem for both is that nasty surprises are lurking everywhere.
Mac McCulloch
PNWRMNM As to paragraph 1, it is common for executive compensation to include stock options, which become more valuable as stock price per share increases. EHH compensation is public information so you can look it up and see if NKP's claim is true.
As to paragraph 1, it is common for executive compensation to include stock options, which become more valuable as stock price per share increases. EHH compensation is public information so you can look it up and see if NKP's claim is true.
According the CSX 2017 Proxy Statement, which can be downloaded from the company's website, Mr. Harrison has a four year employment contract with CSX.
Harrison's compensation consists of an annual salary, an annual target performance bonus, and an option to purchase up to 9,000,000 shares of the company's common stock at the closing price on March 6, 2017 and a ten year term. The option will vest over the four year term of his employment contract.
If the market price of the stock remains above the option price, as it is today, Harrison's shares would generate a substantial gain. If! No one really knows what the shares will do over the next four to ten years.
As was pointed out above, for most Fortune 500 CEOs, the real money is in the performance bonuses and stock options. Salary usually is somewhere around 10 to 15 percent of total compensation.
Trying to stick this as one of EHH's "dirty tricks" is kinda like trying to stick Russia collusion on Trump...it just doesn't stick...at least based on what we know today.
Stock buybacks are a timed-honored tradition of public companies, and it is all the rage on Wall St today. Pretty much every company under the sun is doing it, including very healthy and the very weak.
As far as compensation goes, and I haven't read CSX's proxy or EHH's contract, but in many cases, execs would actually like a lower share price as far as their personal holdings are concerned - that's if they have a stock option to have part of their salary given in stock. Then they want as many shares as possible, so a lower price. Once they retire, well then they want the stock to inflate, you see. Chances are EHH's compensation is much more related to performance, as railroading is a performance business, so this may be of less effect.
But as has become necessary to point out these days, not every move the CSX Chiefs do has some dark alterior motive. I'm not claiming the people at the top are honorable gods, but neither can you classify them as evil villains, either.
If Harrison & Co are trying to run a "corporate raider" scheme, Mr Ichan, the Morgans, the Vanderbilts and Mr Jay Gould would be laughing their pants off - because they're not doing a very good job of it, if that's the case.
Well said Saturnalia...bravo.
What is a company to do with it's excess cash generated (free cash flow)? There are usually three main routes this cash can take:
1. Re-invest in the company. If the internal rate of return for projects exceeds the cost of capital, then this is a valid choice. Companies will typically have a capital expense budget aspect - for railroads it is typically about 15-20% of the revenue. Railroads take an enormous amount of capital. Others can discuss whether or not a project clears the "cost of capital" hurdle much better than I can. This excess cash can also be used to purchase other companies or opportunities. Most railroads these days are shedding lines rather than purchasing lines.
2. Return the excess cash to the shareholders in form of dividends. Shareholders typically will be paying taxes on these dividends.
3. Return the excess cash to shareholders in form of purchasing shares, thus reducing the number of shares and enhancing the income per share going forward. Theoretically the share price will increase, thus resulting in potential capital gains which the shareholder can control paying taxes by choosing when to sell the stock.
The risk of returning excess cash to shareholders in form of dividends is there is a perception that dividend payouts need to continue to rise over time. If a company returns cash in the form of dividend and must later cut the dividend (perhaps during a recession) the stock price might take a dive.
A couple of years ago when there was oil moving by rail and capacity was an issue, my thoughts were to suspend dividends and plow the free cash flow into capacity. Then the bottom fell out of the oil and coal and now the rails seem to have the right amount of capacity for the volumes. There is obvious a reason why I am NOT the CEO of a major railroad. If my plan would have been implemented, billions of dollars would have been invested in unneeded double track, sidings, etc. It is easy to make these "decisions" on a forum such as this, but far more difficult to pull the trigger using real $$$.
Ed
Miningman Well said Saturnalia...bravo.
Seconded!
My position in a Fortune 200 company put me in daily contact with the CEO and the members of the executive committee. They were and are a highly talented, hard working bunch of folks. Like us they are human; they make mistakes, and there is the occasional bad actor, but most executives try to do what is right for their key stakeholders.
MP173What is a company to do with it's excess cash generated (free cash flow)? There are usually three main routes this cash can take:
You missed one.
4. Where possible, reduce debt. Call bonds that may be callable. This would reduce debt service and also increase income.
In the CSX's 2016 Form 10-K report, CSX had one Billion in cash and equivalents yet still borrowed 2.2 Billion in new long term debt.
Liquidity and Working Capital Currently, CSX is well positioned from a liquidity standpoint. The Company ended the year with $1.0 billion of cash, cash equivalents and short-term investments. CSX has a $1 billion unsecured, revolving credit facility backed by a diverse syndicate of banks. This facility expires in May 2020 and as of the date of this filing, the Company has no outstanding balances under this facility. Additionally in 2016, CSX issued a total of $2.2 billion of new long-term debt, $1.4 billion of which was used to repay outstanding debt, to capitalize on the lower interest rate environment. CSX uses current cash balances for general corporate purposes, which may include repayment of additional indebtedness outstanding from time to time, repurchases of CSX's common stock, capital investments, working capital requirements and improvements in productivity and other cost reduction initiatives.
They could have borrowed a smaller amount (say 1.5 B) and used 500 M to pay off the older higher interest debt.
In the same 10-k, the long term debt is 10,962 million and share holder equity is 11,964 million which is slightly more equity than debt. Based on earnings and cash flow, they are not over leveraged so that would indicate that the buy back plan is in order.
But I believe it works best for the sharehoders and the executives.
A buyback is often seen as a show of confidence in a company's stock.. i.e. they're buying back shares because they deem the stock to be a good value at today's price, and they expect the stock price to appreciate sharply in the not too distant future. Or.. maybe they simply want outsiders to think that's what's happening.
Wouln't a buyback also give a company more control of their business?
SaturnaliaTrying to stick this as one of EHH's "dirty tricks" is kinda like trying to stick Russia collusion on Trump...it just doesn't stick...at least based on what we know today.
I would opine that a lot of the suspicion is based not in EHH himself, but his association with Hilal and his Mantle Ridge hedge fund.
Were it not for that association, then perhaps folks would be more accepting of some of the changes, believing them to be steps toward a better CSX.
As it is, I suspect that folks think that many of the measures being taken are not for the benefit of CSX as such, but for the benefit of the hedge fund.
Time will tell if those suspicions are borne out.
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