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When Reality Intrudes: When Is A Stock Buyback Not A Stock Buyback?
Over a year ago we wrote "How The Fed's Visible Hand Is Forcing Corporate Cash Mismanagement" in which we explained that due to ZIRP, management teams are left with just two (very shareholder-friendly) capital allocation choices: stock buybacks and dividends, to the detriment of such much more long-term critical uses of funds as capital expenditures, and to a lesser extent M&A. So far, this observation has proven spot on with buybacks (most of which using leverage to arb the record low cost of debt, notably in the case of Apple) dominating cash allocation decisions. However, there is a key drawback to this strategy: corporate assets whose age has hit all time highs across the globe.
Naturally, this is a critical issue in a world in which the return on assets is now rapidly declining as seen in two years of deteriorating profit margins, and in which as much utility has been extracted as possible from an asset base which in many cases is well beyond its functional age. Logically, more and more companies will have no choice but to reasses capital deployment and in the coming months formerly very shareholder friendly companies will have no choice but to redeploy cash away from dividends and buyback and to long-ignored capex once more.
We bring this up because moments ago Dole Food just provided the missing piece to this capital allocation puzzle.
Recall that is was just three short weeks ago that DOLE announced a stock buyback naturally leading to a brief pop in its stock price. From May
WESTLAKE VILLAGE, Calif.--(BUSINESS WIRE)--May. 9, 2013-- Dole Food Company, Inc. (NYSE: DOLE) today announced that its Board of Directors has approved a share repurchase program for up to $200 million of Dole’s outstanding common stock. The share repurchase authorization, which is effective immediately, permits Dole to effect share repurchases from time to time through open market repurchases (including through Rule 10b5-1 plans to allow longer periods of repurchase opportunity), block trades, privately negotiated transactions, tender offers, and/or other transactions. The timing, method, and amount of any shares repurchased will be determined based on Dole’s evaluation of market conditions, the trading price of Dole’s common stock and other factors.
Turns out the market conditions and stock price were promptly relegated to secondary status following today's surprising announcement scrapping all of the above. Moments ago, DOLE reported that it was scrapping its just announced stock buyback, and that instead it would proceed to renew its aging shipping fleet and spend the money that otherwise would have gone to shareholders to boost its own declining future profitability:
WESTLAKE VILLAGE, Calif.--(BUSINESS WIRE)--May. 28, 2013-- Dole Food Company, Inc. (NYSE: DOLE) today announced that its Board of Directors has approved updating the Company’s owned vessel fleet, with the acquisition of three new specialty built refrigerated container ships for its U.S. West Coast operations, costing approximately $165 million, for a phased delivery in the late 2015 to early 2016 time frame.
“Updating our West Coast shipping capabilities is very important strategically to the Company’s competitive differentiation and future growth prospects,” said C. Michael Carter, Dole’s President and Chief Operating Officer. “These ships will be 27 years old at the time of replacement. The new ships will be more fuel efficient and will be built to Dole’s exacting specifications and design, with a 770 FEU capacity (compared to the replaced ships with 491 FEU) and equipped with gantry cranes.”
Dole also announced the indefinite suspension of the previously announced share repurchase program for up to $200M of its outstanding common stock. “At this time we have decided to use our existing funding resources to take advantage of this opportune window in the shipping industry, when these specialty ships can be built at very competitive costs,” said Carter. “While Dole is also seeking to monetize its excess Hawaii land holdings by actively marketing the approximately 20,600 acres of land that it is not currently farming on the island of Oahu, we do not expect that this land will provide a near-term source of liquidity given the magnitude of farmland involved. With the approximate $165 million investment in ships and the drag on earnings due to significant losses in our strawberry business, the share repurchase program is being suspended indefinitely.”
And there you have it: buybacks or maintenance capex (forget growth capex) - one can't have both, at least not in a world in which Bernanke is still not depositing cash directly to corporations instead of just Primary Dealers, just as DOLE shareholders found out first. And soon to follow will be the same discovery by all other asset-heavy companies, loaded to the brim with a geriatric asset base.
The question then becomes what does the "tapering" of capital to shareholder-friendly distribution mean for the bottom line, and its long-overdue reallocation to replenishing record old assets, and just how will creditors look at a new paradigm in which they actually have to finance corporate growth, instead of using corporations as a passthrough to fund immediate gains in corporate equities they already own?
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tick tock...
http://www.marketwatch.com/investing/bond/10_year
Someone is demanding some yield...
exponential equations (and usury) are a bitch, better print MOAR benny...
What is also fucking fascinating is that Japan has twice our debt/gdp and their 10yr yield is less than half of ours.
Higher private savings rate to support their public debt.
But that's the logical answer, so it's probably wrong in Benny's house of mirrors.
Most of their treasuries are in the hands of the Japanese public. Apparently for many decades they managed to convince their people that the best way to save for old age was to put the money in Japanese Government Bonds. Think economically illiterate, retail, with a very high inertia (i.e. very slow at changing their habits): in other words, the ultimate long-term asset holding sucker.
This of course just makes things ever so more interesting considering the aging of Japanese population and the increasing number of Japanese who are reaching retirement age and selling the Treasuries they own. It's going to be an earth shattering kaboom.
The age of human "assets" in Japan is older than all but Monnaco.
Look at this shit today. Forget stocks. Yields higher, the dollar higher, oil higher....
When structures start to collapse they tend to make all sorts of weird looking shapes...
Now that the generation that built the Japanese economy is old and ready to retire, with all their savings in government bonds, it is time to pull the rug out from under them.
In Japan the wife does the investing of the money.
They are not stupid or economically illiterate but they are very nationalistic.
Another major delivery notice for JPM:
http://www.cmegroup.com/delivery_reports/MetalsIssuesAndStopsReport.pdf
Someone better hope they have more than one vault filled with gold.
i wouldnt sell my gold coins to jamie for $10,000 each
The share repurchase authorization, which is effective immediately, permits Dole to effect share repurchases from time to time through open market repurchases (including through Rule 10b5-1 plans to allow longer periods of repurchase opportunity), block trades, privately negotiated transactions . . .
In other words, they stopped buying their Executive's shares. . .
Cui bono?
privately negotiated transactions must be about moving the Pelosi stash at the 'right' price.
Moar Pinapples...less dividends.
BUY THE FUCKING DIPS!
Like this?
http://www.candywarehouse.com/flavors/sour-candy/products/pop-rocks-dips...
And how much of the stock market gains is from all these buybacks...we have low volumes but these buybacks have to be a big part of those shares counted i would assume.....
I think they will go on...its a way for a CEO to get paid more for his stock options....without getting a raise...who cares about a new ship..that is way past the next quarters results..no one thinks that far ahead.....
As long as the market is surging this is all meaningless chatter. Bernanke is gonna assraped. Yep, been hearing that for about 3 yrs now. It's all meaningless
"...and just how will creditors look at a new paradigm in which they actually have to finance corporate growth, instead of using corporations as a passthrough to fund immediate gains in corporate equities they already own?"
Aye, there's the rub.
Companies to reduce # of employees further, creditors perhaps waking up to a lack of employment affecting a 70% consumer economy, said consumers realizing how little money they have, rates on bods going up, money leaving equities, bubble #2 pop.
"The United States is the only highly developed nation that doesn't require employers to offer paid vacation time."
Who needs a vacation when nobody works?
Going on 18 years of Partyeeee here and counting.
We pretend to work. They pretend to pay us.
We pretend to consume so they pretend to produce...
And they pretend there are good volume and margin numbers. But... if no one is working then how are those numbers being generated/reported?
This is making my head hurt.
We pretend about too much.. the path of least resistance. The visual of a fairy tale story page always comes to mind from "The Emperor Who Wore No Clothes".
You got That right!
Oh, and at the rate I get clothes dirty I figure my wife wishes that I didn't wear any clothes! (my neighbors, on the other hand, are likely grateful)
Who cares? DOW 15,000 by Friday easily.
SheepDog-One - did you mean DOW 16,000 by Friday, or 17,000?
I don't see the problem here. So, Dole is now in the market for a few ships. Is that not a good thing? Someone is actually buying / building stuff instead of swapping paper? Granted, the ships will NOT be built in the states, probably S. Korea.
I think that the bigger part of all of this is that margins are being smashed.
This is Economies of Scale in Reverse in action.
Buy-backs is an effort to check the effects of margin loss.
While a reduction in CAPEX is an important note, I'd figure that this isn't anything that's out of the normal for/in contracting periods. What is NOT normal (according to our notions of there always being this business cycle) is that this contraction does not appear to have any end to it. The troubling point is when it comes down to applying CAPEX to existing P&E, as in upgrades and repairs/replacement. It's possible that many see significant volume drop ahead and realize that their existing P&E is over-sized: and a problem here is that lots of production probably cannot happen without certain volume levels (here's where Economies of Scale in Reverse really bite back)- think suppliers and product channel outlets.
I'm not seeing this as all so simple to claim there's a mis-allocation happening. Even IF the Fed wasn't injecting companies would be facing the same basic currents: the only difference that I can see is that time is being bought, and maybe this extension of time was to figure out how to down-size without collapsing due to the loss of advantage from Economies of Scale (in Forward).
Given our future, most CAPEX is sub-marginal, as there will not be any true end demand from consumers for quite some time (if ever, given the debt load being carried).
That's right, there's also that Debt thing! :-)
This is all going to end up looking like a novice juggler starting out juggling running chainsaws...
"problem here is that lots of production probably cannot happen without certain volume levels (here's where Economies of Scale in Reverse really bite back)- think suppliers and product channel outlets."
Here's the fraying edges appearing:
Airbus supplier Premium Aerotec changes top managementhttp://finance.yahoo.com/news/airbus-supplier-premium-aerotec-changes-17...
...
Anyone want to wager that before too long we'll see these consolidated suppliers being bought up by the end-customers (in this case, Airbus)? When volume drops, as it will, they'll be fucked, and so top will the end-customers, which is why the end-customers will have no option other than to buy them up in order to ensure that those supplies will be available (and by doing so they'll be pulling down their margins).
Once upon a time companies did a lot of their own fabrication. I think that things will start reverting back to this. Those manufacturers that have managed to maintain control of the ownership of the production of their components will hold up pretty well: I've got a Kubota tractor; Kubota makes their own engines, transmissions and axles- this is big for quality control.
A. One would think that Goldman could spring for a another color besides blue, so there is some contrast on the chart for the visually challenged.
B. So, where would the cash come from to fund debt, if not from the Fed and the money printing banks? We do have a debt based economy after all and if interest rates go up, how can money come out of the stock market to fill the gap in lack of money for debt? Someone still has to buy stock that is sold.
The grande-bargain should be the Fed buying as much debt as possible then the US government defaulting to the Fed (only) COMBINED with a balanced federal budget.... to bring things back into balance. Unfortunately the US government is so far out of control that even if there was a default to the Fed they would still spend $1 trillion a year they do not have... just too much waste and corruption and not enough value creation.
I think you're close to painting the picture.
I'd always figured the Fed would implode and wash away all the sins. However, even then there's still the issue of there being NO means for growth- this is not good for a system that's designed only to operate in a growth environment.
"Value Creation" depends on PHYSICAL stuff, NATURAL CAPITAL, which is becoming harder and harder to come by, and definitely not in sufficient enough quantities to support the needs of "growth" (interest), even with a complete elimination of corruption and "waste."
One just doesn't decide on 3 new multi-million dollar ships on the spur of the moment and spastically withdraw a stock buy back option. Somethings up at Dole someone lost and someone won a power struggle.
In the face of rising costs from fuel and labor, going for a new ship that can carry more than the old ones presumably using no more crew than the older ones and possibly the same amount of fuel as for a smaller ship, what's not to love? The ROI is going be significant and doubly so in a higher inflation environment. Not to mention if Dole's older vessels would draw more regulatory expenses under the new MACT rules from the EPA.
There were several in-process statues on Easter Island when it all collapsed.
The mindset is always to push ahead, fear of not being "prepared" to take advantage of the next "cycle." The assumption, however, is that there WILL be another cycle.
It's possible that the order for ships came quite a while ago and that penalties for canceling orders might be high enough to discourage doing so.
For Dole, they either admit that things are going to be bleak and basically quit now OR they go out with guns blazing (and die). It's much easier to attract $$ when you're pushing for glory...
Farmland on Oahu? Hmm.
What a shame they won't be selling it off in, say.... hundred acre parcels.
That was a good use of shareholder cash. Dole was buying shares back at $11.5. Now they could be buying them at $10.5.
Hasn't Dole heard of virtual vessels? It's a goldman technique which involves derivatives on vessel capacity swaps and the sale (pardon the pun) of pinapple and banana futures contracts. The actual transportation of those goods are irrelevant.
So are assets time traveling as well? I may feel more than a year older each year due to use and abuse, but does the same apply for assets. How do they age by more than a year in a year?? Looks like another excel error or perhaps a global tax incentive?
All is well as long as Benny and the Inkjets have the printer checked every Tuesday after POMO and algo folks replace their tubes every two years (maybe once a year). That's all the CapEx that is needed in the New Normal...until one day...but that's a different story.