61–70 of 122 posts
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This would result in the board being sacked for sitting on spare cash and not maximising shareholder return.
Did Apple board got sacked?
> Since 2012, Apple has been buying back shares at the extraordinary rate of around $10 billion per quarter.
Shareholders demanded it.
This article looks a lot like outrage porn. It suggests that there is something wrong with spending 96% of FCF on buybacks without stating it explicitly. I doubt most people without some decent corporate finance training can form an informed opinion about this.
What the reporter should have done, clearly, is get the opinion of one of those benevolent airline executives to explain why cash flow was spent on buybacks instead of literally anything else. They can tell us what we all know - that it is standard procedure and could never comprehend the complexity of corporate finance! That it was for our good, after all, in a way, and that, well, that's how Things Are.
Personally, and this is just me, we should ban the plebeians , oh I mean the uniformed, from making dangerous observations of fact!
Btw most of these shareholders have been smart enough to sell immediately when the markets began falling so they will buy these stocks at the bottom and get bailed out all over again by the taxpayer and watch the capital multiply. I'm all for getting rich but pump and dumps should be (are?) illegal.
If they sold, then they're no longer shareholders; there are new shareholders, and they will be the ones to receive any potential bailout.
There's two sides to every transaction. If people were selling, someone was buying. If someone will be buying, someone will be selling. The sort of people who invest in distressed companies (and I think all airlines count as that right now) tend to be hedge funds and other sophisticated investors; they're hardly going to give any potential gains to previous shareholders asking for their stocks back because they changed their mind hearing about a bailout.
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The argument here is that they actually did need it to sustain operations since there's a significant chance they'll now receive a bailout. The whole point is they took cash they should have kept as a backup and then used it to boost share price instead.
Which is a fair point but ... and I'm going to stop after this because I've made my point to the best of my ability ... but if they did that then the money wouldn't be called free cash flow because they've decided they need it for emergencies. They could be extremely risk tolerant and they'd still be sending all their FCF to shareholders. The amount would simply be smaller. I'm totally on board that bailouts are the…
The airlines simply made a business decision and bet their company on never needing to sustain a drop in traffic, and they've lost the bet.
If you take whatever you have left after paying for rent, food and insurance, that's your FCF. You can now decide whether you want to save some or all of that, spend it on a new bed, or blow it on coke. The airlines chose what made them/their shareholders happy in the short term and potentially very sad in the long term.
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But some of these airlines have a dividend already. American Airlines has a 2.5% dividend. That is returning cash to investors. Why buy back shares then? If they only paid a 2.5% dividend in 2015, they would have returned some cash to investors. But instead, they also spent $3.5 billion (!) on buybacks in 2015, almost half their market cap at the time. https://www.fool.com/investing/general/2016/01/15/expect-mor...
Dividends and share buybacks are economically equivalent, the only difference is tax efficiency.
Also, they are efficient in that they defer the taxation to the point of share sale, but they are inefficient in that holding a stock for less than a year in the US taxes them at the much higher short-term capital gains rate.
Furthermore, the dividend is cash, it cannot go to zero without giving you a chance to realize it - whereas a stock can go to zero at any time (and many will likely do shortly). I was a small investor in a company that did a respectable 5X exit for shares of the purchaser. I was thus locked up for 6m, during which they did a stock buyback but later promptly went down by 80 percent for reasons unrelated to the purchase of the company I was an investor in.
What was supposed to be a nice 5X exit, turned to a meager 1.5X, and I was extremely lucky that the lockup ended September (that is, same year) because otherwise, for tax reasons, I would have been approx -0.5X (that’s all my investment and then half again) on a 5X exit — as I didn’t have any taxes profits in the following years to net again. (You can carry losses forward for tax reasons, not backwards).
Dividends and buybacks are similar when everything is hunky-dory but never equivalent.
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Then the money would probably not be free cash. It would be held under some sort of actuarial title for dealing with risk. Maybe amortization? I'm not an accountant. If the business needs it to sustain operations then it probably isn't free cash flow.
I read it that airlines could have simply put the cash in a bank account. Pretty mch what Apple does. becasue that amount of free cash would sure be handy right now.
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Capitalize profits socialize losses that is American corporate way. Executives keep the profit and expect taxpayers to bailout losses.
"Barack Obama says banks paid back all the federal bailout money" https://www.politifact.com/factchecks/2012/oct/25/barack-oba...
FCF is supposed to go to shareholders: it's what's left over after spending money running and growing the business. And this problem (and related solutions) will probably apply not just to airlines but also restaurants, retailers, etc. In normal circumstances, chewz is right and they should either call up more capital from existing shareholders or go under. But these are not normal circumstances. 1) Everyone is capit…
Capitalize profits socialize losses that is American corporate way. Executives keep the profit and expect taxpayers to bailout losses.
Worth noting that this will be the 3rd industry which Warren Buffett has been both invested in and bailed out of during a crisis.
>"I think there have been almost 100 airline bankruptcies. I mean, that is a lot," he said. "It's been a disaster for capital."
Airline bailouts are still distaste for capital. Berkshire did not buy Airlines so that they will be bailed out. They are thinking that they got a bad century out of the way. Their thinking is that Airlines are becoming business that has no bankruptcies or bailouts over long term.
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Just don't forget that a lot of "capitalists" are pensioners, college endowments, etc.
Pensioners and wage earners are not capitalists. They depend on wages to live. Calling yourself a capitalist doesn't make you have capital. True capitalists are those who do not need wages (e.g. CEOs of airliners, billionaires, etc.).