100% agree that share repurchases are more tax-efficient - rather pay capital gains tax rate than the individual income tax rate on dividends.
100% agree that share repurchases themselves are not the issue, but leveraging up to make share repurchases is an issue. Of course, the piper will be paid years later when the debt needs to be refinanced as higher interest payments will bite into future earnings.
it is one thing to borrow for capital needs where the cash is being put into a long-lived asset, and another thing to borrow for a one time "sugar high" returning over 100% of net income to shareholders each quarter as was done so prodigiously during the 2010s.
The past is history and the future is a mystery. We'll see how it all shakes out during the latter half of the 2020s.
NKP guy IIRC, average-man investors (before the PennCentral debacle, anyway) used to buy major railroad stocks like PRR for their dividends, which were usually decent-sized and dependable. I don't recall hearing of people buying such stocks hoping for a big increase in share prices in a few years. The focus on share price may be misplaced, but that could be a consequence of today's economic culture which doesn't seem to care about dividends as much.
IIRC, average-man investors (before the PennCentral debacle, anyway) used to buy major railroad stocks like PRR for their dividends, which were usually decent-sized and dependable. I don't recall hearing of people buying such stocks hoping for a big increase in share prices in a few years.
The focus on share price may be misplaced, but that could be a consequence of today's economic culture which doesn't seem to care about dividends as much.
The biggest change is just the realization by Wall St. that share repurchases are a far more tax-efficient way to return profits to investors than dividends are. Smart people have known this for a while, but it took a while for the idea that repurchases are an equally valid use of profits to catch on with the public at large. (As your post suggests, even then the lesson hasn't quite penetrated to the retail investor.)
Issuing debt to fund share buybacks is a little harder to defend, IMHO. If I thought the stock was undervalued relative to current interest rates, I could buy the stock on margin myself, thank you very much. I don't need the board of directors to make that decision for me.
Dan
Erik_Mag With respect to railroads, using stock buybacks to go from equity financing to debt financing is a recipe for disaster
With respect to railroads, using stock buybacks to go from equity financing to debt financing is a recipe for disaster
For some of the investors involved, maybe. For the population more broadly, probably not. All large railroads are producing very healthy returns on invested capital and have been for some time - and they are not particularly large companies anymore. (Union Pacific is only the 56th-largest company in the S&P 500 by market cap.) If they get in trouble for financial games unrelated to their operations, someone will still take the company as a going concern. Similarly, if their operations weaken, a strong balance sheet probably won't protect the operating people from having the push hard on the cost-savings pedal.
On a related note: regulations on financial transactions, like limiting stock buybacks, would be silly and probably unproductive. Regulations that change the operating cash flow are the ones that have the potential to weaken the industry and hurt people other than the shareholders and bondholders.
That "rail revival" baloney was aimed at institutional investors -not- shippers.
Open for business!
George Hilton maintained that one of the things that did in the interurbans was relying too much on debt financing versus equity financing. With the latter, cutting off dividends during a downturn will tick off the shareholders, but won't bankrupt the company. With respect to railroads, using stock buybacks to go from equity financing to debt financing is a recipe for disaster - though most of the hedge funds would have laready taken the money and run.
Balt drops the MOAB of all truth bombs right there.
Remember - 'Activists' always think they are smarter than everyone else.
Whether they are or not.
Never too old to have a happy childhood!
NKP guyThe focus on share price may be misplaced, but that could be a consequence of today's economic culture which doesn't seem to care about dividends as much.
I would opine that share price isn't a concern as much as how much it can be increased, and how quickly.
I don't think "long term" is a phrase in many of today's investor's vocabularies.
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...
In the 12-13 years after the Great Recession when the Federal Reserve kept interest rates unusually low, the railroad companies almost across the board touted them returning more cash to shareholders than net income earned.
UP, for instance, in 2018 returned $10.5 billion and in 2019 returned $8.4 billion, both amounts over 100% of net income for the year.
They did so with dividends, but the vast majority was stock repurchases using issuances of long term debt.
Long term debt for most of the large railroads except for CN increased by several magnitudes over where it had been before the Great Recession.
All that debt will have to be rolled over eventually, likely at higher rates.
SD60MAC9500Traffic growth on the rails is just that.. A dog that won't hunt.. The current scenario concerning NS, and Ancora just proves that point thousands of times over... The fact that over the last two decades, a hedge fund can launch a proxy battle scaring most of the C1's into submission. Speaks volumes to the industry.. The rails move liquid now... Money doesn't require labor, physical plant, rolling stock, or pesky fuel with its cyclical price movement.. The real customer is the shareholder, and has been for sometime. Should we accept the status quo?...
The fact that over the last two decades, a hedge fund can launch a proxy battle scaring most of the C1's into submission. Speaks volumes to the industry.. The rails move liquid now... Money doesn't require labor, physical plant, rolling stock, or pesky fuel with its cyclical price movement.. The real customer is the shareholder, and has been for sometime.
Should we accept the status quo?...
That is the cross that any business that deals with real products as opposed to financial products have to deal with in dealing with their stock holders.
Not every business can clear bushels of cash without producing real products or services.
Deregulation gave shareholders the opportunity to make lots of money, but they got greedy.
Reregulation will eventually put railroads back where they were in the 1970's: struggling to survive.
Traffic growth on the rails is just that.. A dog that won't hunt.. The current scenario concerning NS, and Ancora just proves that point thousands of times over...
The fact that over the last two decades, a hedge fund can launch a proxy battle scaring most of the C1's into submission. Speaks volumes to the industry.. The rails move liquid now... Money doesn't require labor, physical plant, rolling stock, or pesky fuel with its cyclical price movement.. The railroads main customer is the shareholder, and has been for sometime.
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