- When companies eat themselves (and it’s a good thing)
- 2019 as the “Year of the Cannibal”…
- … But Democrats want to disrupt the feast
- Earnings scorecard: Stronger reaction to weaker numbers
- Another mainstream mention of “de-dollarization”
- Busted: Cops seize totally legal industrial hemp (again)
- Reader disputes our outlook for health care system’s demise
OK, yes. It’s a totally clickbait-y subject line for today’s episode of The 5.
The cannibalism thing is a metaphor. And a pretty good one too, courtesy of our income maven Zach Scheidt. (It’s not original to him, but we’re glad he’s put it back on our radar.)
Two months ago, he told his readers 2019 would be “the Year of the Cannibal.”
“In 2018, companies saw a huge boost in their cash flow thanks to the Tax Cuts and Jobs Act that President Trump signed at the end of 2017,” Zach explains.
“The law gave U.S. businesses with foreign operations a huge incentive to bring home some of the cash they were holding overseas.”
A good chunk of that money was returned to shareholders in the form of dividend increases. But another sizeable amount was used for stock buybacks — or cannibalism, if you prefer.
“They pretty much mean the same thing,” Zach says. “A company buys back shares of its own stock, essentially eating itself.”
A company’s well-executed buyback is a great thing if you’re a shareholder.
“Stock buybacks reduce the supply of stock shares on the market — essentially making the remaining shares more valuable,” says Zach. “They also increase each shareholder’s portion of the company’s earnings.
“Let’s say a company earns $2 a year and has 10 shares outstanding. The earnings per share are $0.20. Or said another way, each share represents 20 cents of the company’s profits.
“Now say it buys back two shares but still earns $2. Now the EPS is $0.25… so each share presents 25 cents of the company’s profits.
“Boom — instant value!”
Oh, and don’t forget this bonus: “When a company buys back shares,” says Zach, “dividends are still paid to investors. Only now, there are fewer shares over which a company must divide its cash set aside for dividends. So in this environment, dividends naturally increase, giving you even more income!”
This year, corporate America plans to spend $940 billion on buybacks, according to Goldman Sachs — way more than it plans to spend on dividends.
“The key to collecting your share of this cash being spent,” says Zach, “is to invest in the companies with the biggest cash balances that have announced large share buyback programs and dividend hikes.”
Want an easy way to capitalize? Look no further than Apple, Zach says.
“The company generates more than $23 billion in cash each year and currently holds more than $230 billion. Apple is actively buying back shares of stock and spent $62.9 billion on shares in the second half of last year.”
Yes, AAPL’s share price got beat up starting last fall. As far as Zach is concerned, that only means “we’ve got an excellent opportunity to buy the stock at a discount.
“Meanwhile, the company’s own buyback program will be more effective, as Apple can now retire more shares for every billion dollars in cash spent.”
There’s been a buyback lull in recent weeks… but it’s about to break, says our investment banking veteran Nomi Prins.
“Last year, U.S. companies announced a whopping $1.1 trillion worth of plans to purchase their own outstanding stock,” she tells us. But as of mid-December, only $800 billion of that stock has actually been bought back.
“That means there could be another $300 billion of the total 2018 target still waiting for a green light from their respective companies to hit the market.”
Corporate America got gun-shy during the fourth quarter of last year as the stock market briefly fell out of bed. Amid all the worries about a trade war, a global slowdown, Federal Reserve policy… companies sensibly acted to conserve their cash.
Those worries are abating for the moment. And with share prices lower than they were three or four months ago — think Apple — “that means companies can buy back their shares at lower levels, or cheaper prices. That would make their outlay, potentially, go a lot further.”
And in only a few weeks from now, it’ll be go time. That’s because right now many companies are still in a “buyback blackout window” mandated by the government.
“The period covers the time just before and after companies post earnings results,” Nomi explains. “The sell-off in October coincided with the third-quarter earnings season’s ‘blackout period.’ The combination of negative environmental factors plus fewer buybacks drove markets even lower.
“Now, once earnings season and the current blackout period is over, Wall Street will be unleashed to buy large blocks of stock for their major corporate clients.”
So what about the Republicans referenced in the subject line of today’s email?
From yesterday’s Wall Street Journal: “At least five declared or likely Democratic presidential candidates want to restrict how much stock U.S. companies can buy back from shareholders.”
Why would they want to do that? “Democrats argue that buybacks enrich executives and shareholders at the expense of workers and long-term economic growth.”
Sen. Bernie Sanders is working up a bill with Senate Minority Leader Chuck Schumer — requiring companies to pay higher wages and better benefits before they can proceed with buybacks.
Or as they put it in a New York Times Op-Ed on Sunday — “paying all workers at least $15 an hour, providing seven days of paid sick leave and offering decent pensions and more reliable health benefits.”
This anti-buyback sentiment isn’t an altogether new thing.
In 2015 we noted how Hillary Clinton took a shot at “quarterly capitalism” — claiming that dividend increases and share buybacks come at the expense of long-term growth.
Her preferred fix at the time was an adjustment to the treatment of capital gains in the tax code.
The proposal never went anywhere, and it didn’t become a major campaign plank. Too abstract.
But clamping down on buybacks, with the benefits supposedly going to workers? That might catch fire. At the very least, the Democrat-controlled House could hold hearings — keeping the issue in the spotlight until the party wins the Senate, the White House or both.
“This is just another example of unnecessary government intervention that could be solved in a free market,” says Zach Scheidt.
“Remember, buybacks typically boost stock prices, which benefits all shareholders — big and small. So while this bill may directly help workers, it increases the red tape on corporations, which in turn hurts investors like us.”
Not much to say about the markets — all the major U.S. stock indexes are in the red, but only a bit.
At 25,412 the Dow has now rallied more than 3,600 points from its Christmas Eve lows.
The noteworthy earnings number of the day is General Motors — up 1.3% after a solid “beat.”
Here’s the funny thing about this earnings season: For the most part, profits are still growing — just not as fast as they were six months or a year ago. That much we expected. But the stock market reaction to the numbers is the strongest since 2009.
Our Greg Guenthner points us to a report from Bespoke Investment Group. So far this quarter, the average company’s share price has seen a one-day bump of 1.12% after reporting its numbers. “If this pace keeps up for the remainder of the reporting period,” Bespoke says, “it would be the best earnings season in terms of stock performance since the early stages of the bull market.”
Or as Greg sums up, “It appears most investors were expecting the worst from this earnings season following the December meltdown. Now the sold-out bulls are forced to chase their favorite stocks as they leap higher.”
Gold is steady at $1,312… amid a very strange mainstream media story about the metal that’s almost channeling our own Jim Rickards.
The story by Reuters columnist Swaha Pattanaik — republished among other places at The New York Times’ DealBook website — points out that central banks around the world bought gold last year at the highest pace “since the United States broke the link between gold and the dollar in 1971.”
“For these institutions,” Pattanaik writes, “it’s less a short-term gamble that prices of the precious commodity will rise, and more a concern that dollar dominance could gradually be eroded.”
Eroding dollar dominance? Do tell…
Pattanaik points to ”concern about America’s use of dollar dominance in the global financial system to exert its authority” — specifically the new sanctions against Iran. “No wonder that the European Commission President Jean-Claude Juncker wants to promote the euro as a global currency, rather than accepting dollar price tags for planes, energy and other goods.
“Even more important is the rise of China” — now a fifth of the global economy even as the yuan makes up less than 2% of central bank reserves. The smaller number is sure to rise.
“Reserve managers may not know how long it will take for China’s currency, or the euro, to nibble away at the dollar’s pre-eminence,” Ms. Pattanaik concludes. “But they are taking small precautionary steps to diversify their exposure away from the dollar.”
You should do likewise as the theme of “de-dollarization” goes increasingly mainstream. Jim Rickards recommends keeping 10% of your portfolio in gold.
Here we go again — another police bust of people hauling industrial hemp, now legal in all 50 states and overseas U.S. territories under a law passed in December.
This time it was Idaho state troopers who stopped a truck hauling 6,701 pounds of hemp, convinced it was the wacky weed even though it has no mind-altering properties. The driver is out on bond, facing felony charges.
The Colorado-based company shipping the hemp is now suing both Idaho State Police and Ada County.
Nor is there a resolution yet to the hemp case we told you about last month in Oklahoma. The DEA has run tests on the hemp haul, and a couple of samples came in with THC content (that’s the intoxicating stuff) slightly above the 0.3% threshold for illegal cannabis.
“If it was marijuana, it was barely marijuana,” attorney Bransford Shoemake tells Tulsa’s CBS affiliate. He represents two of the four men who remain charged — hoping to get their $40,000 bond reduced. For now, they’ve been jailed for more than a month…
“Of course Pelosi and the Democrats can’t really support single-payer health care,” a reader writes after our most recent health care musings yesterday.
“Most of the medical insurance companies are ‘too big to fail.’”
“But our health care system collapsing under its own weight in 15 years? I think you underestimate the power of bureaucracy. I think it will be much more than 15 years unless much more of our bureaucratic autocratic polarized system collapses than just the health care.”
The 5: Perhaps. But we’ll paraphrase Margaret Thatcher’s famous line about how the problem with socialism is that eventually you run out of other people’s money.
The problem is the health care cartel can extract only so much money from everyday Americans via insurance premiums, drug costs, taxes, etc.
As we’ve been saying for most of this decade, the percentage of the federal budget devoted to health care keeps doubling every 20 years, going back to the early 1970s. By the early 2030s, it will consume 50 cents out of every dollar spent by Uncle Sam.
Except it won’t. Something’s gotta give before that.
And don’t even get us started about how Medicaid is the biggest line item in most state budgets these days, and how it’ll be competing with underfunded pensions for scarce revenue during the next recession…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. As we figured, there was no real news in the State of the Union address last night.
Other than perhaps what was missing — as in any mention of the national debt now verging on $22 trillion. Crickets.
Before the speech, someone asked acting White House chief of staff Mick Mulvaney — who was sort of a budget hawk as a South Carolina congressman — whether the topic would be included. By one account, he answered, “Nobody cares.”
Power corrupts…
