Trouble in Closed Access paradise?

[MP173]

Michael:

You appear to be narrowing a statement down to one issue (comparison of income statement to balance sheet)...the number of shares.

Personally, I look to the income statement for the number of shares, not the balance sheet.

ed

[MichaelSol]

Michael:

You appear to be narrowing a statement down to one issue (comparison of income statement to balance sheet)...the number of shares.

Personally, I look to the income statement for the number of shares, not the balance sheet.

ed

Well, a passing remark certainly became an issue to some. My reference point was to shares issued, because, between shares outstanding and treasury shares purchased with cold hard company cash, trends with significant financial implications can be read more clearly whereas the shares outstanding on the Income Statement tells a more limited story. Depends on what you are looking for. The Balance Sheet, of course, tells the whole story, including shares outstanding (issued - treasury) and to me, presents the complete picture.

However, what is significant about stock buybacks at BNSF which is somewhat different than a typical stock buyback is that over the past decade, BNSF has had generally negative cash flow. Typically, corporations with free cash flow will use it buy stock back, not corporations like BNSF.

"BNSF’s ratio of total debt to total capital was 47.8 percent at the end of 2000, 41.6 percent at the end of 1999, and 41.2 percent at the end of 1998. The increase in 2000 over the prior year is attributable to the increase in debt and lower equity due primarily to higher share repurchases." P. 25, Year 2000 Annual Report.

Stock buybacks at BNSF are typically achieved with borrowed money, and that has four implications.

1) the company incurs future interest expense, further eroding cash flow. BNSF spent roughly $1.5 billion on its stock buyback that year. The company is still paying interest on that buyback at between 7 and 8%.

2) the price of the remaining outstanding stock "may" rise as a result, but then the dividend declines as a percentage of return, making the stock look less, not more, valuable. A 4% dividend might go to 3%, even though the dividend amount remains the same. Is that attractive to institutional investors? Doubt it. I think that creates a downward pressure on the price as institutional investors cash out looking for the better return.

3) the stockholder's overall equity declines as a result of the increase in treasury shares at the same time that, in the specific case of BNSF, interest charges increase. A double whammy.

4) significant number of shares are placed on the market seeking compensation, rather than measuring the market price for investment purposes. This dilutes the power of the market to effectively appraise the true market value of BNSF stock. The fact that a large buyer is also in the market, regardless of share price, further erodes the essential function of the market pricing mechanism.

Yet, with significant quantities of management shares diluting the market on a continuing basis what would they do?

Well, that is the conundrum of putting the people who manage the company into a position of a vested interest in the stock price as a compensation tool, rather than as an investment strategy and to me, that represents the weakness of a stock repurchase program based on executive compensation, rather than as a logical use of free cash flow.

[greyhounds]

Michael:

You appear to be narrowing a statement down to one issue (comparison of income statement to balance sheet)...the number of shares.

Personally, I look to the income statement for the number of shares, not the balance sheet.

ed

 

Sol just tried (again) to deceive and distort.  Now he's trying to cover his tracks.  Same old same old.

BNSF reduced its shares outstanding by 85,000,000 thereby increasing shareholder wealth (that's their job) while investing heavily in the railroad.    They're a class outfit.  Sol can't stand that so we get the same old deceit and distortion.

[MichaelSol]

Sol just tried (again) to deceive and distort.  Now he's trying to cover his tracks.  Same old same old.

BNSF reduced its shares outstanding by 85,000,000 thereby increasing shareholder wealth (that's their job) while investing heavily in the railroad.    They're a class outfit.  Sol can't stand that so we get the same old deceit and distortion.

Overall "shareholder wealth" doesn't increase after a stock buyback. The corporation as a whole is worth what it was before, but minus the cost of the repurchase -- which is a charge against capital. If the corporation borrows money to purchase outstanding shares, the net worth of the corporation decreases even more and overall shareholder wealth decreases even more. BNSF admitted as much in its 2000 Annual Report. $1.5 billion in 7-8% debt does not increase shareholder wealth, no matter how poor Greyhound's math is. No tracks to cover there.

Further, the increase in treasury shares resulting from such a buyback further diminishes shareholder equity, which plainly, and I mean plainly, shows on the Balance Sheet, for anyone who can read one.

No tracks to cover there either, unless of course they are Greyhounds'.

[MichaelSol]

Sol just tried (again) to deceive and distort.  Now he's trying to cover his tracks.  Same old same old.

BNSF reduced its shares outstanding by 85,000,000 thereby increasing shareholder wealth (that's their job) while investing heavily in the railroad.    They're a class outfit.  Sol can't stand that so we get the same old deceit and distortion.

The average price per share in 1999 was about $30 per share. If you owned 10,000 shares, your "shareholder wealth" was about $300,000.

After the stock buyback in 2000, the price per share averaged about $28.00 for the following year. Your "shareholder wealth" was reduced to about $280,000 from what it was prior to the buyback.

Interestingly, this is what you would conclude would happen from the Balance Sheet when the issued shares were deposited as Treasury stock. The average sophisticated investor might also make decisions based on that $1.5 billion in additional debt, rather than the simplistic notion that the number of outstanding shares, alone, is determinative of stock value.

This is what is interesting to me about people who are immune to any factual presentation. Here is a very good example of a very large stock buyback, with the following results:

1) debt increased substantially
2) the debt to equity ratio deteriorated significantly
3) shareholder wealth declined
4) the market value of the company declined
5) cash flow was further impaired by additional interest charges in following years

There is a person here who insists those are positive results, which leads me to think he is as knowledgeable on this as he is the wheat industry, western gateways, or any of the broad range of topics he speaks to without any discernible knowledge or experience.

[Murphy Siding]

The average price per share in 1999 was about $30 per share. If you owned 10,000 shares, your "shareholder wealth" was about $300,000.

After the stock buyback in 2000, the price per share averaged about $28.00 for the following year. Your "shareholder wealth" was reduced to about $280,000 from what it was prior to the buyback.

      Is there anything that says the sole reason the stock went from $30 to $28 was the buyback?  There might have been a few other factors that influenced the reletive stock price, don't you think?

[beaulieu]

Michael:

You appear to be narrowing a statement down to one issue (comparison of income statement to balance sheet)...the number of shares.

Personally, I look to the income statement for the number of shares, not the balance sheet.

ed

The reason you need to be aware of the figures on the Balance Sheet is because Stock Options are like a trap that can be sprung at any time. Particularly if there are large amounts of them. Executives are most likely to exercise them at the time most advantageous to themselves, just before they sell the stocks.

[beaulieu]

The average price per share in 1999 was about $30 per share. If you owned 10,000 shares, your "shareholder wealth" was about $300,000.

After the stock buyback in 2000, the price per share averaged about $28.00 for the following year. Your "shareholder wealth" was reduced to about $280,000 from what it was prior to the buyback.

      Is there anything that says the sole reason the stock went from $30 to $28 was the buyback?  There might have been a few other factors that influenced the reletive stock price, don't you think?

Murphy, the buyback per se, had nothing to do with the change in value. What would change the value is if BNSF took on additional debt. Which Michael says they did. I don't have the relevant BNSF Annual Report since I don't follow them. Buying back their stock would worsen the Debt to Equity ratio by itself. As would taking on additional debt.

[MichaelSol]

The average price per share in 1999 was about $30 per share. If you owned 10,000 shares, your "shareholder wealth" was about $300,000.

After the stock buyback in 2000, the price per share averaged about $28.00 for the following year. Your "shareholder wealth" was reduced to about $280,000 from what it was prior to the buyback.

      Is there anything that says the sole reason the stock went from $30 to $28 was the buyback?  There might have been a few other factors that influenced the reletive stock price, don't you think?

Well, it is the logical non-sequitur to which I make the point. You cannot say that shareholder wealth increases through a debt-financed stock repurchase when, in fact, there is no evidence of an increase in shareholder wealth, but rather, the exact opposite.

"Other reasons" other than the fact that the Balance Sheet specifically says that shareholder wealth declined? Well, income declined during the three year period. Does that answer the question, or merely beg the question as to the efficacy of incurring a significant increase in debt during a period of declining earnings to finance a very large stock buyback?

If I have not explained by now why I look more closely to the Balance Sheet for information about stock shares, rather than just the Income Statement, and if it is not clear by now that in the case of the BNSF that shareholder wealth should have declined, and did, then what on earth is the utility of a Balance Sheet?

The fact that GAAP, as represented on the Balance Sheet, accurately shows the decline in shareholder wealth does not preclude other influences on stock prices, not at all. But the fact that shareholder wealth did indeed decline cannot be used as evidence that they "maybe" shouldn't have if something else hadn't occured.

You would have to present a case that GAAP is wrong in this instance, not merely that unnamed "other things" also affect stock prices.

[Murphy Siding]

The average price per share in 1999 was about $30 per share. If you owned 10,000 shares, your "shareholder wealth" was about $300,000.

After the stock buyback in 2000, the price per share averaged about $28.00 for the following year. Your "shareholder wealth" was reduced to about $280,000 from what it was prior to the buyback.

      Is there anything that says the sole reason the stock went from $30 to $28 was the buyback?  There might have been a few other factors that influenced the reletive stock price, don't you think?

Murphy, the buyback per se, had nothing to do with the change in value. What would change the value is if BNSF took on additional debt. Which Michael says they did. I don't have the relevant BNSF Annual Report since I don't follow them. Buying back their stock would worsen the Debt to Equity ratio by itself. As would taking on additional debt.

     I guess what I was asking, was the buy-back the sole cause & effect of the stock price being lower?  That is how it appears to be presented here.  If  that is what Michael is implying, that seems like something of a stretch.

[n012944]

The average price per share in 1999 was about $30 per share. If you owned 10,000 shares, your "shareholder wealth" was about $300,000.

After the stock buyback in 2000, the price per share averaged about $28.00 for the following year. Your "shareholder wealth" was reduced to about $280,000 from what it was prior to the buyback.

      Is there anything that says the sole reason the stock went from $30 to $28 was the buyback?  There might have been a few other factors that influenced the reletive stock price, don't you think?

Murphy, the buyback per se, had nothing to do with the change in value. What would change the value is if BNSF took on additional debt. Which Michael says they did. I don't have the relevant BNSF Annual Report since I don't follow them. Buying back their stock would worsen the Debt to Equity ratio by itself. As would taking on additional debt.

     I guess what I was asking, was the buy-back the sole cause & effect of the stock price being lower?  That is how it appears to be presented here.  If  that is what Michael is implying, that seems like something of a stretch.

I agree.  While that may not be what Michael is implying, that is the way that it is coming across.  There could have been several outside factors six years ago that caused the stock price to fall.

 

Bert

[MichaelSol]

The average price per share in 1999 was about $30 per share. If you owned 10,000 shares, your "shareholder wealth" was about $300,000.

After the stock buyback in 2000, the price per share averaged about $28.00 for the following year. Your "shareholder wealth" was reduced to about $280,000 from what it was prior to the buyback.

      Is there anything that says the sole reason the stock went from $30 to $28 was the buyback?  There might have been a few other factors that influenced the reletive stock price, don't you think?

Murphy, the buyback per se, had nothing to do with the change in value. What would change the value is if BNSF took on additional debt. Which Michael says they did. I don't have the relevant BNSF Annual Report since I don't follow them. Buying back their stock would worsen the Debt to Equity ratio by itself. As would taking on additional debt.

     I guess what I was asking, was the buy-back the sole cause & effect of the stock price being lower?  That is how it appears to be presented here.  If  that is what Michael is implying, that seems like something of a stretch.

Hmmm.

The only absolute --"sole cause and effect" -- I see is Greyhounds' absolute contention as follows: "BNSF reduced its shares outstanding by 85,000,000 thereby increasing shareholder wealth (that's their job)."

In light of the evidence exactly to the contrary, that's not "a stretch"?

On the other hand, my comment was "the fact that GAAP, as represented on the Balance Sheet, accurately shows the decline in shareholder wealth does not preclude other influences on stock prices, not at all."

Interesting.

The point is, using GAAP as a measure of shareholder value as per the Balance Sheet, shareholder value should have declined.

In fact, it actually did.

I see nothing strange about that.

If it hadn't happened, maybe I would go looking for a cause.

But, it seems like GAAP was working as intended.

Now, if you want to challenge the underlying mechanism of GAAP, by all means have at it. If there were other things affecting stock price, they apparently did so in conformance with what GAAP showed as per the Balance Sheet. Really not sure what you are trying to propose here. That shareholder value declined because of some other factor, but, without the other factors would have been different than the GAAP predicted outcome? But the result wasn't different. Are you suggesting the result should have been different? Why?

The Income Statement and its corollary Balance Sheet use a "considerable" amount of information regarding company performance, using GAAP, to create those "bottom lines". Are you saying that non-financial data should/could have affected the stock differently, even though "they" apparently didn't?

You gentlemen are asking one of those non-sequitur questions. Something like, just because the stock result was what GAAP predicted, doesn't this really mean "something else" caused the result?

Well, what?

[Murphy Siding]

You gentlemen as asking one of those non-sequitur questions. Something like, just because the stock result was what GAAP predicted, doesn't this really mean "something else" caused the result?

Well, what?

     Fair enough, let me try to focus the question a little bit.  Are you saying that the stock price went down, solely because of the buy-back?

[MP173]

You can slice and dice data every which way until Sunday. 

For instance from January 1999 thru December 2000, BNI took it on the chin with share prices falling from $33 to $29 while the S&P 500 for the two years advanced about 9%. 

However, shift your attention to January 1, 2001 thru today and you will find:

BNI stock has risen in that period of time about 130%.  During the same time the S&P is DOWN.  A $10,000 investment in S&P would be about $9800 while the BNI investment would be worth over $23000.

So, draw your own conclusions.  If BNI's stock fell during 1999/2000 because of the stock buyback program, underperforming the S&P badly, then certainly the dramatic rise in it's stock price and shareholder value during the past 5.5 years must at least partially attributable to the same criteria.

BNI's stock fell during the said period because there were fewer buyers than sellers.  That's all.

Try to read more into it and you are suddenly left with lots of data which is manipulated in order to reach a conclusion which meets your ends.

The stock fell because people didnt want it.  Plain and simple.

The stock rose because there was a demand for it.  Plain and simple.

There are always reasons below the surface, but ultimately the stock price is based on a daily auction.

ed

[MichaelSol]

BNI's stock fell during the said period because there were fewer buyers than sellers.  That's all.

Try to read more into it and you are suddenly left with lots of data which is manipulated in order to reach a conclusion which meets your ends.

The stock fell because people didnt want it.  Plain and simple.

The stock rose because there was a demand for it.  Plain and simple.

There are always reasons below the surface, but ultimately the stock price is based on a daily auction.

ed

Usually, investors look at the financial data, and its usually not "below the surface" it's right there in the Income Statement and Balance Sheet, right where GAAP says it ought to be.

The year 2000 was a nice test for the theory of stockbuybacks increasing shareholder value. Not much else happened that year. The one big thing at BNSF, from a financial perspective, was the stock buyback.

In 2000, a huge stock buyback program obviously generated negative results. Those negative results resulted in a decrease in shareholder value. It simply was no coincidence that stock prices fell.

No matter how you slice or dice it.

Now, since then?

Look at 2001. Assets increase, liabilities decreased, retained earnings increased, and all of these together exceeded the liability increase in accumulated treasury shares from the stock buyback that year. Compared to shareholder wealth which declined in 2000, the Balance sheet shows an increase in shareholder wealth.

Same thing happened in 2002. Growth, including additional paid in capital, exceeded the liability incurred from the buyback program. Shareholder wealth increased again. In 2003, once again a variety of positive factors including retained earnings exceeded the liabilities incurred from the stock repurchase programs. Shareholder wealth again increased. Happened again in 2004 and 2005.

Stock prices went down after the largest stock repurchase, and have gone up as the Balance Sheets show other, positive factors offsetting the negative impact of the stock repurchases.

This to me shows the usefulness of GAAP. It also shows that stock repurchases, by themselves, are negative. That is, stock values have mirrored the shareholder wealth shown on the Balance Sheets and when stock repurchases overwhelm the effects of growth or other positive developments, stock prices go down because shareholder wealth objectively declines.

Since 2001, the Balance Sheets show that shareholder value increased during that time, but for reasons unrelated to buybacks, indeed, despite rather than because of stock buybacks. Logically, share prices also advanced.

No matter how you slice it, that's what happened.

It's a nice case study.

The odd thing is that your comments seem to suggest you don't like an interpretation based on a straightforward reading of the company's financial statements as a basis for ascertaining shareholder value. Rather, you allege "lots of manipulated data." Well, it's BNSF's data, and it follows GAAP, not anything else. Not much to really manipulate unless you think BNSF is a'la Enron. Well, I don't.

GAAP seems to work nicely. I think they provide a better basis for analysis than the fact that "there is a demand" for the stock. Dotcoms had that demand. Their financial statements did not support that demand.

Which was right? The "demand" or GAAP?

You can have your "demand" theory. It explains nothing. It is not rational. I will stick with GAAP. It explains rational "demand".

 

[n012944]

Maybe some of this had something to do with the price drop

Bert

 

Annual 2000

Investors’ Report

BURLINGTON NORTHERN SANTA FE CORPORATION

INVESTORS' REPORT - UNAUDITED

Annual 2000

1

NEWS

Contact: Richard Russack FOR IMMEDIATE RELEASE

[phone]

Burlington Northern Santa Fe Reports

Fourth Quarter/Full Year 2000 Results

· Earnings of $0.65 per diluted share, compared with fourth quarter 1999

earnings of $0.69 per diluted share.

· Fourth quarter operating income of $544 million -- $59 million lower than

fourth quarter 1999 operating income of $603 million, principally due to a

$75 million increase in fuel expense.

· Revenues of $2.34 billion, $51 million or 2 percent lower than fourth quarter

1999 revenues of $2.39 billion.

· Full-year adjusted earnings of $2.45 per diluted share -- an increase of

1 percent over full-year 1999 adjusted earnings of $2.43 per diluted share.

· Full-year adjusted operating income of $2.15 billion, a 4 percent decrease

over 1999 adjusted operating income of $2.24 billion.

· Revenues of $9.21 billion, an increase of $16 million from full-year 1999

revenues of $9.19 billion.

· Free cash flow for the twelve months ended December 31, 2000 was $431

million, an increase of $171 million over the prior year, primarily driven by

reduced capital spending.

2

FORT WORTH, Texas, January 23, 2001 - - Burlington Northern Santa Fe

Corporation (BNSF) (NYSE: BNI) today reported fourth quarter 2000 earnings of $0.65 per

share on a diluted basis, 6 percent lower than fourth quarter 1999 earnings of $0.69 per

diluted share.

“Reduced traffic volume from a slowing economy, early winter weather hampering

some Midwestern rail operations and sharply higher fuel prices impacted BNSF’s fourth

quarter earnings,” said Matthew K. Rose, President and Chief Executive Officer.

“However, through cost containment, we increased free cash flow 66 percent to $431

million for full-year 2000 versus $260 million in 1999.”

Revenues of $2.34 billion for the 2000 fourth quarter were $51 million lower than

the prior-year period. Intermodal revenues increased $17 million, or 3 percent, to $692

million, principally reflecting higher international volumes and new truckload business.

Carload revenues were $620 million, a decrease of $27 million, or 4 percent, from last year

principally as a result of weak chemicals and forest products revenues. Coal revenues in the

quarter continued to be softer than the prior year and declined $25 million, or 5 percent, to

$528 million largely due to high customer stockpiles accumulated in 1999 as well as the

impact of weather on our operations in December 2000. Agricultural Commodities

revenues decreased $16 million, or 4 percent, to $347 million, primarily due to weak Pacific

Northwest and Mexico exports for corn and wheat.

Operating expenses of $1.80 billion were $8 million higher than the 1999 fourth

quarter. Fuel expense was $75 million higher than 1999, despite a 3 percent decrease in

consumption. The average cost of diesel fuel per gallon, excluding hedge effects, increased

34 cents to $1.06. Overall expenses, excluding fuel, were down by $67 million, or 4 percent

primarily a result of lower environmental and incentive compensation expenses.

Operating income was $544 million for the fourth quarter 2000 compared with $603

million a year ago. The operating ratio increased to 76.5 percent for the fourth quarter 2000

compared with 74.5 percent in 1999.

3

Full-Year 2000 Results

BNSF’s adjusted earnings per share for year ended December 31, 2000 was $2.45 on a

diluted basis, a 1 percent increase from 1999 adjusted earnings of $2.43 per diluted share.

Revenues for the year were $9.21 billion, an increase of $16 million. Adjusted operating

expenses of $7.1 billion for 2000 increased by $102 million or 1 percent. Fuel expense was $232

million higher than 1999 due to sharply higher fuel prices, despite a 1 percent decrease in

consumption. Adjusted operating income fell to $2.15 billion from $2.24 billion for 1999.

BNSF’s adjusted operating ratio increased slightly to 76.4 percent for 2000 compared with 75.4

percent a year earlier. Excluding the $232 million of increased fuel expenses, the operating ratio

would have been 73.9 percent.

[MichaelSol]

 Quoted:

"Full-Year 2000 Results

BNSF’s adjusted earnings per share for year ended December 31, 2000 was $2.45 on a diluted basis, a 1 percent increase from 1999 adjusted earnings of $2.43 per diluted share."

Isn't that the vaunted "bottom line"?

Earnings went up.

But share prices went down.

The Balance Sheet, oddly enough, showed a decrease in shareholder equity.

Odd how the Balance Sheet was a more accurate predictor of share value than adjusted earnings.

Of course, given the dire prognostications by management (which ended up with an earnings increase), you might also think that the largest share buyback in the history of the company might have been improvident under those circumstances as adversely affecting shareholder wealth.

Naahh, of course you wouldn't.

 

[n012944]

(heavy sarcasim) Your right, the ONLY reason stock prices fell was because of the stock buy back.  ( Does anyone have a smiley with its eyes rolling?)

 

Bert

[MichaelSol]

(heavy sarcasim) Your right, the ONLY reason stock prices fell was because of the stock buy back.  ( Does anyone have a smiley with its eyes rolling?)

Bert

Well, it beats your argument that stock prices fell because earnings went up!

[MP173]

The stock went down, as I stated earlier because there was more selling pressure than buying pressure.

The interesting thing would be what would the stock price fallen to without the share buyback?  I believe the stock did drop down to about $21.

Regarding GAAP...it is what is available.  Remember what it stands for "Generally Approved Accounting Principals".  Generally.  There is still lots of leeway in the reporting of financial information.  It is really a difficult task to look at a condensed Income Statement, Balance Sheet, or Statement of Cash Flows and get too much information.  SOX probably helped the reporting, but one must still question the quality of earnings involved.

ed

[MichaelSol]

Yahoo Money has a nice feature called "Basic Chart" and by clicking on the "max" range for stock prices, a nice chart going back to 1980 will display.

http://finance.yahoo.com/q/bc?s=BNI&t=my&l=on&z=m&q=l&c=

The Stock repurchase program began in 1996. By 2004, probably 95% of the shares repurchased to date had been purchased. Just eyeballing it, but the period 1980 to 1989 shows strong growth of the stock purchase price of BN. A trend line through that data would show the strongest growth of any period since 1980. No stock buybacks.

Something happened in 1989, I'm not recalling what, but it wasn't any good for the stock.

For the period 1989 to 1997, there was another period of general growth in the stock price -- shareholder value. The five year period 1999 to 2004 was essentially flat. Indeed, for the period 1996 to 2004 the stock price of BN/BNSF stock was stagnant. A trend line through the data would be flat.

It was during that time that nearly 80 million shares were re-purchased through the stock buy-back program. After the huge stock buy-back in 2000, the stock declined and remained depressed for nearly four years.

Statistically, in this case there is no evidence that stock buybacks boost shareholder value. It's not there. It didn't happen. Indeed, the stock repurchase program coincides with the slowest growth in shareholder equity during the entire 25 year period, indeed, given the reduction in shares, shareholder wealth per share suffered negative growth, during an eight year period of stock buybacks. It is upon objective facts such as this that Greyhounds reaches conclusions diametrically opposed to any reality.

Now, in the case of BN, this makes more sense to me than the explanation that there were just more buyers than sellers, 1980-1989, everybody went on holiday in 1989 and just weren't buying stocks, etc. etc. That's a result, not a cause.

The "cause" in this case is clear. BNSF was not repurchasing shares out of free cash flow, but invariably incurred debt to repurchase the shares. Inevitably, that makes it a net loss transaction. That debt doesn't finance any new track, no locomotives, no rolling stock of any kind. And that debt is incurred in a company that already has an uncomfortably high debt to equity ratio.

It doesn't take an accountant to see that if 10 million shares of stock are retired representing $200 million of shareholder equity, but the Company incurs $200 million in debt to purchase the shares, the remaining shareholder equity is reduced by $200 million. That's routine Balance Sheet stuff. The transaction cannot increase shareholder value.

Now, as to the hypothetical of "well other things affect stock price." Yes they do. I keep saying that, with no effect. However, if BNSF did everything exactly the same, year to year, you can see what the effect of that stock repurchase was.

Not only was debt incurred that reduced shareholder equity, but at 8%, in the following year a $16 million interest charge is added to other costs and expenses normally incurred.

The Company therefore has even less net cash flow, or a greater negative cash flow, than in the year prior to the buyback. As a specific result of the buyback, earnings must drop in the following years. If borrowed on a ten year note, the total cost of the buyback to the company will be $360 million, principal plus interest. So, shareholders get a $200 million buyback, and the Company's net worth ultimately declines by $360 million compared to what it would have been without the buyback.

It is not even a trade-off, it is a large net loss to shareholder equity under circumstances such as this.

Now, "other things." Other things don't change the accounting function, nor what happens through the stock repurchase program. None of the numbers relating to that can change. What can change is, for instance, coming off of contracts, being able to charge higher rates, higher traffic because of a generally expanding economy, full utilization of fixed assets. The Company can certainly make more money, that shows up clearly in the stock chart for the years 2003 forward.

But does that change the fact that the stock repurchase program reduced shareholder value? No. It means that shareholder value was increased by greater earnings. But that doesn't change the effect on the bottom line of the share repurchase program. Does it permit the implication that because the company is now doing well, that therefore stock repurchase programs enhance shareholder value?

No, not at all.

BNSF had a good year last year. But you can't conclude that therefore Hurricane Katrina was a good thing for railroads. You have to look at the stock repurchase program on its merits, and those are measured by accounting principles. And accounting principles are what investors utilize to determine the health of a company and the reasonableness of the investment.

It does raise the question, however, if a person so inclined went back and did pro forma Balance Sheets and Income Statements without the stock buybacks. And the question is this and is easily answered. Would BNSF have had more borrowing power, and the ability to expand capacity faster with or without the stock repurchase programs?

The answer is in that debt to equity ratio. BNSF would have had much more favorable financial leverage over the past six years than it has had. The Company has had to rely on short term notes over the past three years, at percentages substantially above prime rate, in order to provide operating funds. That is one of the penalties of incurring debt to pay shareholders, rather than to provide working capital.

However, that higher interest rate penalty is also an additional expense burden, due to the stock repurchase program. I am working from memory now on this, but if I recall, BNSF had about $1.2 billion in short term financing, at about 2.5% above prime. That's an additional $30 million per year payable in interest charges because the Company could not get prime rate.

That $16 million per year in interest on the original buyout debt pales in signficance to the $30 million annual cost penalty of having an unfavorable debt to equity ratio, and the reliance on short term notes.

 

[Anonymous]

This is a clear example of why an unregulated private integrated rail network is suseptable to one internal corporate division bleeding out another for the ostensible overall benefit of the whole corporation.  The easiest way to shift money around within an integrated railroad is to defer construction and maintenance of actual track, and use that money for more non-operational items, usually involving the stock price.

Deferred maintenance has been a long standing problem with the integrated model, because it is easier to hide within the total corporate balance sheet.  Separating the divisions and requiring transparancy for each division's actions is one salient check on such actions, since an infrastructure company's attempts to defer maintenance would be much tougher to get away with, e.g. where are they going to hide the transaction?

[beaulieu]

The stock went down, as I stated earlier because there was more selling pressure than buying pressure.

The interesting thing would be what would the stock price fallen to without the share buyback?  I believe the stock did drop down to about $21.

Regarding GAAP...it is what is available.  Remember what it stands for "Generally Approved Accounting Principals".  Generally.  There is still lots of leeway in the reporting of financial information.  It is really a difficult task to look at a condensed Income Statement, Balance Sheet, or Statement of Cash Flows and get too much information.  SOX probably helped the reporting, but one must still question the quality of earnings involved.

ed

Consider these two things that happened. First the Stock buyback would not have been so bad IF it had been done using Free Cash flow. What BNSF did do was borrow the money, from the stand point of the people who sold their shares it doesn't matter but from the standpoint of those who held on to the stock they now have to repay the loan (Debt) and pay the interest until they do. Now I am looking at the 2001 Income Statement because it gives the figures for 1999 and 2000 as well.
Interest expense went from $387  million dollars in 1999 to $463 million  in 2001 (the full effect of the borrowing would not hit in 2000) a increase of $73 million dollars of expenses, for the same period revenues went from $9,195 million dollars to $9,208 million dollars, an increase of only $13 million dollars. From this you can see that economies where going to need to be found just to offset the increased expenses.

[TomDiehl]

This is a clear example of why an unregulated private integrated rail network is suseptable to one internal corporate division bleeding out another for the ostensible overall benefit of the whole corporation.  The easiest way to shift money around within an integrated railroad is to defer construction and maintenance of actual track, and use that money for more non-operational items, usually involving the stock price.

Deferred maintenance has been a long standing problem with the integrated model, because it is easier to hide within the total corporate balance sheet.  Separating the divisions and requiring transparancy for each division's actions is one salient check on such actions, since an infrastructure company's attempts to defer maintenance would be much tougher to get away with, e.g. where are they going to hide the transaction?

Maybe in your mind it's "clear," but to the rest of us it's clear that you want to dictate to a privately owned corporation how to spend their profits. If you had any actual experience in bookkeeping, you'd realize that all profits can't be pushed into one area of investment, without affecting either the immediate stock price, or the long term viability of the company. A balance has to be sought to give a boost to both. Exactly where this balance will fall is the decision of the board of directors, and in most cases, will be different than the opinions of inexperienced outsiders.

Deferred maintenance was and is a problem because this was an area that was selected to make financial cutbacks when the company needed to do that. You imply that it was the only action they took in tough financial times. Anyone with actual accounting background will tell you that just isn't so. Even some of the former employees that were laid off during this time can tell you that. 

[MichaelSol]

TomDiehl: Anyone with actual accounting background will tell you that just isn't so.  

And your accounting background is ... what?

[Anonymous]

This is a clear example of why an unregulated private integrated rail network is suseptable to one internal corporate division bleeding out another for the ostensible overall benefit of the whole corporation.  The easiest way to shift money around within an integrated railroad is to defer construction and maintenance of actual track, and use that money for more non-operational items, usually involving the stock price.

Deferred maintenance has been a long standing problem with the integrated model, because it is easier to hide within the total corporate balance sheet.  Separating the divisions and requiring transparancy for each division's actions is one salient check on such actions, since an infrastructure company's attempts to defer maintenance would be much tougher to get away with, e.g. where are they going to hide the transaction?

Maybe in your mind it's "clear," but to the rest of us it's clear that you want to dictate to a privately owned corporation how to spend their profits.

It's not about expenditures from profits, it's about quasi-falsification of the balance sheet.  Given the Sarbanes legislation regarding the requirement of greater transparency in corporate accounting, it may be that the railroad companies no longer can get away with deferring maintenance to sex up the balance sheet.

Deferred maintenance was and is a problem because this was an area that was selected to make financial cutbacks when the company needed to do that. You imply that it was the only action they took in tough financial times. Anyone with actual accounting background will tell you that just isn't so. Even some of the former employees that were laid off during this time can tell you that. 

Not sure what we disagree on here.  Deferred maintenance certainly wasn't the only action, but it seems to have been the prefered action, and that is the implication.

[MP173]

This goes back to my original point...why have a stock repurchase program when you can use the $$$ for capex?  I must question their motives for doing this at this time.

I still maintain the 80 million share purchase in 1999/2000 was in response to the large investments made earlier and the lack of growth.   They had to do something and usually companies purchase their stock or issue special dividends (microsoft).  The unusual thing is the use of leverage to do so.

It would seem to me that a company should use its cash to seek the highest return possible. 

ed

[greyhounds]

This goes back to my original point...why have a stock repurchase program when you can use the $$$ for capex?  I must question their motives for doing this at this time.

I still maintain the 80 million share purchase in 1999/2000 was in response to the large investments made earlier and the lack of growth.   They had to do something and usually companies purchase their stock or issue special dividends (microsoft).  The unusual thing is the use of leverage to do so.

It would seem to me that a company should use its cash to seek the highest return possible. 

ed

Because you have to pay the investors for their investments.  Same as you have to pay the workers for their labor and the suppliers for the fuel.

Railroad capacity expansion is a risky business.  It's hard to get the money out once you've put it in. 

It's not like rolling stock.  With rolling stock if the business doesn't develop you can move it elsewhere and use it.  That new track is where it is.  Sure you can take it back up and relay it.  But your constructiion cost is sunk and you can not get it back if the traffic doesn't develop and stay developed.

Until right now, the railroads have not earned their "cost of capital".  That means any investment in their fixed plant was viewed as a destruction of wealth by the investment community.  The investment community wanted the money taken out of the railroad and put to better use. (As they saw it.)

This lead to some real confrontations between Wall Street and BNSF management.  BNSF wanted to build for the future.  Wall Street wondered why.  To them there was no future, the money would be lost if it was invested in railroad fixed plant.

BNSF wound up doing the stock buy backs as a method of molifying their capital suppliers.  They'd take money out of the railroad and give it to the investors, while they continued to invest in the railroad.  It took good management to pull that off.   Mr. Krebs, you did good.

I think the conflict and resulting compromise were a good thing.  Money and investments need to be taken seriously - they shouldn't be made "on the come".  But our railroads need to keep their capacity adequate.  That's a new thing that hasn't existed for almost 100 years. 

The powers that be worked this "new thing" out well.  BNSF has had some problems moving Powder River Coal, but that's about it.  And they fixed that quickly.  They now move 50 trains per day out of the Powder River.  They've kept their system adequate for the traffic while keeping their capital suppliers happy. That's good railroading in any sane person's book.

As to borrowing for the stock buy back:  "When a company has used profits for improvements, it may lawfully borrow an equivalent sum of money for the purpose of a dividend, if upon a fair estimate of its assets and liabilities it has assets in excess of its liabilites, and capital stock equal to amount of the proposed dividend."   That's from a Chicago and Alton case over 100 years ago cited on page 154 of "The Chicago and Alton Railroad" by Gene V. Glendinning.

It's no different than if they paid out the profits in dividends (or, alternatively, by stock buy back) and financed the improvements through borrowing. (which they couldn't do because they weren't earning their cost of capital)  BNSF (Krebs) found a way through.  He found a way to make the capacity increases while keeping the investors invested.

God Bless the United States of America and the BNSF.

 

 

[TomDiehl]

This is a clear example of why an unregulated private integrated rail network is suseptable to one internal corporate division bleeding out another for the ostensible overall benefit of the whole corporation.  The easiest way to shift money around within an integrated railroad is to defer construction and maintenance of actual track, and use that money for more non-operational items, usually involving the stock price.

Deferred maintenance has been a long standing problem with the integrated model, because it is easier to hide within the total corporate balance sheet.  Separating the divisions and requiring transparancy for each division's actions is one salient check on such actions, since an infrastructure company's attempts to defer maintenance would be much tougher to get away with, e.g. where are they going to hide the transaction?

Maybe in your mind it's "clear," but to the rest of us it's clear that you want to dictate to a privately owned corporation how to spend their profits.

It's not about expenditures from profits, it's about quasi-falsification of the balance sheet.  Given the Sarbanes legislation regarding the requirement of greater transparency in corporate accounting, it may be that the railroad companies no longer can get away with deferring maintenance to sex up the balance sheet.

Deferred maintenance was and is a problem because this was an area that was selected to make financial cutbacks when the company needed to do that. You imply that it was the only action they took in tough financial times. Anyone with actual accounting background will tell you that just isn't so. Even some of the former employees that were laid off during this time can tell you that. 

Not sure what we disagree on here.  Deferred maintenance certainly wasn't the only action, but it seems to have been the prefered action, and that is the implication.

Now you're accusing the railroads of questionable accounting practices, without proof as usual.

Defered maintenance can be applied to the infrastructure, as well as the rolling stock, so splitting the ownership of the tracks and the trains is not going to make that go away. Another fantasy of the open access concept.

[MichaelSol]

"greyhounds":

 The investment community wanted the money taken out of the railroad and put to better use. (As they saw it.) ...  They'd take money out of the railroad and give it to the investors ...

Just a few days ago, it was:

BNSF reduced its shares outstanding by 85,000,000 thereby increasing shareholder wealth (that's their job)

Oops, we went from increasing shareholder "value" to taking money out of the corporation, decreasing shareholder value.

Do you suppose Greyhounds is "more right" now, than he was then?