“I urge every CEO in America to publicly commit not to buy back their company’s shares next year. Because workers face the physical and financial consequences of the coronavirus, our business leaders cannot abdicate responsibility for their employees, ”Biden tweeted on March 20.
President Trump has said he would be okay with a ban on stock repurchases as a condition of US companies seeking rescue from the federal government. It is a complete reversal of his administration’s previous argument that repurchases put money back into the economy.
Now that it looks like the financial stimulus package is about to be passed by Congress, all companies seeking a rescue service must agree to stop their repurchases during the duration of the assistance plus another year after the loans have been repaid.
T]And although shareholders have not complained, the reality is that repurchases have hurt many large companies because that money could have been used to pay off debts and save for a rainy day.
Well, is rainy day here, dressed as corona.
Companies harmed by repurchases: Exxon Mobil (XOM)
I was recently on the receiving end of some angry comments from readers, probably Exxon Mobil (NYSE: XOM) shareholders, because of my article on March 11, “Investors should not touch Exxon Mobil with a 10-foot pole.”
Let me first say that I would not want stock losses to my biggest enemy. I have made lots of mistakes in my career writing about stocks. I would be the first to congratulate those who wish me sick if XOM would start on a $ 100 course. I just do not think that will happen.
A March 25 article in Globe & Mail March 25 strengthened my faith. I’m not the only one who believes that fossil fuels go the way of dodo. But I deviate.
In addition to cross-sectoral headwinds, XOM’s long history of repurchases has damaged the company’s future by wasting capital that could have been used to pay off debt at a time when oil prices are hurting all companies except Saudi Aramco.
Between 2006 and 2015, Exxon Mobil repurchased $ 210 billion worth of shares. That’s $ 21 billion a year. The company canceled its repurchases in 2016, but it should have stopped them in 2006.
In 2014, Exxon repurchased 136 million shares of its $ 13.2 billion stake. The number of shares decreased by 3.1%. It paid an average price of $ 97.06 per share, 61% higher than its current stock price.
If this money were repaid, Exxon would have half as much debt. And it’s just a single year of repurchases.
As we have seen with the airlines, everything is fine until it is not.
United Airlines (UAL)
I recently wrote about United Airlines’ (NASDAQ: UAL) abysmal capital allocation policies.
Source: NextNewMedia / Shutterstock.com
Of course, I could easily have replaced UAL with one of the other major airlines. They have become a lightning rod against the repurchase of shares. But it happens when you spend 96% of your free cash flow on share repurchases and then cry wolf.
The stimulus package should ensure that these addicts cannot dip in the cake until they pay back Uncle Sam. If I had my way, I would go back to the days when repurchasing shares was illegal. You do not have to go far back. They were made kosher in 1982 during the Reagan years.
Want to guess how many great CEOs are celebrating the day Reagan came to power? 100%.
However, if you look at United’s recent share buybacks, they bought back $ 1.6 billion of their stock in 2019 and $ 1.2 billion the year before. It paid an average of $ 76.29 per share, 51% more than where it is currently traded.
How many billions in grants and loans do you think United will ask for? My guess is $ 2.8 billion.
Simon Property Group (SPG)
I just want to say in advance that I am generally favorable about Simon Property Group (NYSE: SPG) and the work CEO David Simon has done during an extremely difficult period for the mall’s owners when retail turned into an omnichannel experience where online played much more significant role.
Source: Jonathan Weiss / Shutterstock.com
However, Simon’s family holding company owns 8.4% of its stock, which means that it benefits more than any of a smaller number of shares.
Over the past two years, Simon has repurchased $ 713.9 million of its stock at an average price of $ 159.35. That is 60% more than the current share price. When so many retailers fail, that does not seem like the best use of their capital.
In this case, I do not suggest that it should have used the funds to repay the debt. Instead, I think it would have made a nice pillow to help some of its retail partners who have not been able to open their stores recently.
Over the past two years, a $ 714 million increase in cash would more than double what it currently has on its balance sheet. During these challenging times, it could have made a difference.
Earlier in March, I suggested that Boeing (NYSE: BA) could climb back to the $ 300s in June or July when the 737 MAX was back in the air. On March 24, reports came that the company planned to restart the planet’s production in May.
Source: Alex JW Robinson / Shutterstock.com
I would think that coronavirus has put some hopes of a restart in July in jeopardy. Sources say, however, that they have asked suppliers to have parts ready in April, so you never know. If Trump had his way, Boeing would actually fly then.
CFO Greg Smith recently said that the company is in dire need of some help as it has frozen out of the credit markets.
Over the past two years, Boeing has repurchased 33 million shares at an average price of $ 354.55 per share, 54% higher than where it is currently traded. With $ 27.5 billion in long-term debt at the end of December, the $ 11.7 billion used for repurchases could have been a practical tool for self-financing.
A large part of my bullish feeling towards Boeing has previously relied heavily on its free cash flow generation. Assuming everything returns to normal by the end of 2020, I expect the crane to resume flow.
However, I never suggested that it would go big when buying shares. I did not and I do not. It is not cheap to make airplanes. Boeing needs all the cash they can get their hands on.
I do not believe that any oil and gas company, no matter how solvent, should buy back its stock at a time when the world is switching to alternative energy sources that do not come from fossil fuels.
Source: Jeff Whyte / Shutterstock.com
At best, Chevron (NYSE: CVX) can hope that the Saudis give up their desire to control the global oil market. They will not come. Or they can save money to make sure they can survive when oil prices sometimes drop to $ 15 a barrel where only Saudi Aramco can make money.
I recently suggested that the Chevron stock become much more attractive if it refuses to use its free cash flow for long-term share repurchases, avoiding the fate that befell the aviation industry. Capital allocation is everything.
In that article, I pointed out that Chevron repurchased $ 21.75 billion of its stock between July 2010 and the end of 2018. Chevron paid an average of $ 111.08 per share for its shares during those eight years. This is 38% higher than where the shares are currently traded.
And while it’s not as bad a return as Exxon’s managed with its repurchases, it’s still a terrible waste. I hope for the sake of the shareholders that they have learned their lesson about repurchasing shares.
In July 2017, I wrote a story that questioned why Ford (NYSE: F) did not buy back its shares. I mean, if it was as cheap as some people thought – it was around $ 12 at the time – the smartest thing it could do would be to invest in the stock.
Source: Vitaliy Karimov / Shutterstock.com
As Ned Ryerson (Groundhog Day) would say, “Am I right, or am I right?”
Seriously, though, I’m the guy who said repurchases should be banned. If I thought it made sense, it sure did. In retrospect, we know that it would have been a serious mistake on Ford’s part. If I shop at $ 5.40 as I write this, it would have been a new kick in the groin for the long-suffering carmaker.
It makes me want to double my aversion to share repurchases. It’s because you’re pissed off if you do and you’re pissed off if you do not. Rarely, if you are not Apple (NASDAQ: AAPL), you win the buy-back game.
The last time Ford made a major purchase of its shares was in 2014. They paid just under $ 2 billion for 116 million of their shares.
This is an average price of $ 17.24 per share, 69% higher than the current share price. Ouch.
Marriott International (MAR)
TopHotelNews published an article in April 2017 that says everything you need to know about Marriott International (NYSE: MAR) pivoting into a business model after paying $ 13.3 billion for Starwood Hotels and Resorts last September.
“We are proud to announce the sale of this iconic resort [Westin Maui Resort and Spa] and to expand our portfolio with our strong global partners Trinity and Oaktree, says Leeny Oberg, CFO of Marriott International. “Sales demonstrate the strength of the Westin brand and reaffirm our commitment to our accessibility strategy as we continue our merger integration.”
The acquisition gave Marriott more than 30 hotel brands and 6,000 rooms. That’s good news. But as a result of the acquisition, Marriott’s long-term debt jumped from $ 3.8 billion in 2015 to $ 8.2 billion at the end of 2016. It ended 2019 with $ 10 billion in debt.
Still, Marriott spent $ 2.3 billion on its stock in 2019 at an average price of $ 132.95 per share, 36% higher than the current stock price. In February 2020, even though the coronavirus had already raised its ugly head, the company bought back $ 150 million of its stock for $ 145.42 and paid an even more expensive price for its shares.
And now it wants a split? Please. Marriott did not have to buy Starwood and added all that debt. Marriott did not have to inflate nearly $ 2.5 billion on stock repurchases, but it did.
What if its capital allocation screams asset light?
Will Ashworth has been writing about full-time investing since 2008. Publications where he has appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger and several others in both the United States and Canada. He especially likes to create model portfolios that pass the test of time. He lives in Halifax, Nova Scotia. At the time of writing, Will Ashworth had no position in any of the above securities.