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?