Peak Corporate Earnings (?)

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vtsnowedin
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Post by vtsnowedin »

fuzzy wrote: If they are big corporations, they are already past their usefulness for society. The wider your customer base, the poorer a service you can offer and still rake in the dough. Anything large is an exercise in hiding cash from taxmen. If it was illegal for any organization to have more than 100 employees, how would the world be worse?
I'll have to think about that tomorrow as I gas up the truck at an Exxon station on my way to McDs for lunch before picking up some tools at tractor supply and some paper products from Proctor and Gamble.
vtsnowedin
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Post by vtsnowedin »

raspberry-blower wrote: Bottom line is if the big Corporations are investing far more in share buybacks as opposed to R & D then they have passed the stage of rapid growth and are now into the more stagnant stage of the business bell curve
Again I see it as the best use of cash on hand given the business climate of the day. After all they can resell those shares on the market anytime they need to raise cash can't they?
To look at it in simple terms assume a company with just four stock holders holding equal shares. They each hold one quarter of the companies assets. Now use cash (an asset) to buyout one of the four. The other three each has one third of the remaining assets which might be oil yet in the ground and subject to future potential price growth which they will now only have to split (through dividends) three ways instead of four.
raspberry-blower
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Post by raspberry-blower »

vtsnowedin wrote: Again I see it as the best use of cash on hand given the business climate of the day. After all they can resell those shares on the market anytime they need to raise cash can't they?
No. Because what happens when companies buyback their own stock they then cancel those shares.
There is nothing to stop said company from issuing more shares - usually through a rights issue although other options are available - to raise additional capital although with interest rates at historic lows this is not the preferred option.

This was posted up at Naked Capitalism today that explains why the share buyback craze is so destructive:
Lambert Strether wrote:The heroin driving their addiction is stock buybacks—a company using its own profits (or borrowed money) to buy back the company’s own shares. This directly adds more wealth to the super-rich because stock buybacks inevitably increase the value of the shares owned by top executives and rich investors. Since top executives receive the vast majority of their income (often up to 95%) through stock incentives, stock buybacks are pure gold. The stock price goes up and the CEOs get richer. In this they are in harmony with top Wall Street private equity/hedge fund investors who incessantly clamor for more stock buybacks, impatient for their next fix.

For the few, this addiction is the path to vast riches. It also is the path to annihilating the manufacturing sector. (For a definitive yet accessible account see “Profits without Prosperity” by William Lazonick in the Harvard Business Review.)

Wait, wait, isn’t this stock manipulation? Well, before the Reagan administration deregulated them in 1982, stock buybacks indeed were considered stock manipulation and one of the causes of the 1929 crash. Now they are so ubiquitous that upwards of 75% of all corporate profits go to stock buybacks. Over the last year, 37 companies in the S&P 500 actually spent more on buybacks than they generated in profits, according to Buyback Quarterly.
A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools - Douglas Adams.
johnhemming2
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Post by johnhemming2 »

vtsnowedin wrote: The share price stays up because future dividend obligations are reduced.
No. The price is increased by a large buyer in the market (the company)
vtsnowedin
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Post by vtsnowedin »

johnhemming2 wrote:
vtsnowedin wrote: The share price stays up because future dividend obligations are reduced.
No. The price is increased by a large buyer in the market (the company)
On the day of the sale certainly but I was thinking longer term.
johnhemming2
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Post by johnhemming2 »

vtsnowedin wrote:
johnhemming2 wrote:
vtsnowedin wrote: The share price stays up because future dividend obligations are reduced.
No. The price is increased by a large buyer in the market (the company)
On the day of the sale certainly but I was thinking longer term.
The large purchaser makes a much bigger difference than the differential rate of dividend payments. Effectively the company underwrites the share price.
vtsnowedin
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Post by vtsnowedin »

johnhemming2 wrote:
vtsnowedin wrote:
johnhemming2 wrote: No. The price is increased by a large buyer in the market (the company)
On the day of the sale certainly but I was thinking longer term.
The large purchaser makes a much bigger difference than the differential rate of dividend payments. Effectively the company underwrites the share price.
No the long term price of a stock is determined by future profits per share.
No profits = no dividends= on value.
johnhemming2
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Post by johnhemming2 »

vtsnowedin wrote: No the long term price of a stock is determined by future profits per share. No profits = no dividends= on value.
Market sentiment always plays a big part. The marginal effects of a share buy back on dividends are much smaller than the effect on underwriting the price simply because the quantity of stock traded in a day is relatively low.

For example as far as the London market is concerned about 10M shares in BP changed hands yesterday of a total of about 18,900 M in issue. BP was doing a buyback (I think they stopped about a year ago, but have not checked) and were buying back about 5m a day. That is a lot compared to the market turnover.
vtsnowedin
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Post by vtsnowedin »

johnhemming2 wrote:
vtsnowedin wrote: No the long term price of a stock is determined by future profits per share. No profits = no dividends= on value.
Market sentiment always plays a big part. The marginal effects of a share buy back on dividends are much smaller than the effect on underwriting the price simply because the quantity of stock traded in a day is relatively low.

For example as far as the London market is concerned about 10M shares in BP changed hands yesterday of a total of about 18,900 M in issue. BP was doing a buyback (I think they stopped about a year ago, but have not checked) and were buying back about 5m a day. That is a lot compared to the market turnover.
The goal is to conduct the buybacks on down days so as to get the shares as cheaply as possible and in small enough numbers so as to not greatly effect the price. Exxon mobile has bought back about two billion shares over the last decade and has managed to more then double there dividend per share now returning more then 3% for current buyers. and much more then that for long term investors that have had their stock split and multiplied several times.
Over 50 percent of Exxon shares are held by institutions such as the State retirement fund I'm getting checks from. Less then 10 percent is in the hands of executive and large individual owners.
http://www.vuru.co/analysis/XOM/dividendsBuybacks
raspberry-blower
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Post by raspberry-blower »

A timely essay by Wolf Richter that puts the current state of play firmly in perspective

Wolf Richter: What the heck is happening to the Share Buyback boom?

The top 10 companies buying back their shares:
Wolf Richter wrote: Apple retained its crown in this elect field with $7.2 billion in buybacks in Q3, followed by GE, distantly, with $4.3 billion. Over the past 12 months Apple repurchased 31.1 billion of its shares, GE $21 billion. Here are the ten biggest buyback queens:
1.Apple: $7.22 billion
2.GE: $4.29 billion
3.Microsoft: $3.55 billion
4.Allergan: $3.19 billion
5.McDonald’s: $2.77 billion
6.Citigroup: $2.53 billion
7.JP Morgan: $2.29 billion
8.AIG: $2.26 billion
9.Home Depot: $2.14 billion
10.Yum! Brands: $2.09 billion
The sectors that have seen the biggest decline in Q3:
Wolf Richter wrote:
1.Energy: -62%
2.Materials: -55%
3.Information technology: -41%, dragged down by new-found stinginess at Oracle, Intuit, Motorola, and Apple.
4.Industrials -36%, dragged down by Honeywell, Quanta Services, and Caterpillar.
The big problem with this buyback craze:
Wolf Richter wrote: Despite the decline, buybacks remained a huge buying force in the market. At the end of Q3, trailing 12-month buybacks ate up 66% of net income, about the same as a year ago, with 119 companies in the S&P 500 blowing more on buybacks than they generated in earnings. And 109 companies blew more on buybacks than they generated in free cash flow. As ludicrously high as this sounds, it’s the lowest count since Q2 2013.

And much of it is funded with debt. Over the past three years, aggregate debt of the S&P 500 companies has grown 1.7 times faster than aggregate cash and short-term investments, according to FactSet
Companies are adding more debt onto their balance sheets than the cash they generate through day-to-day business. This won't end well
A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools - Douglas Adams.
johnhemming2
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Post by johnhemming2 »

Companies like Apple may be able to do this sort of thing without repatriating their profits (which means they avoid some tax).
vtsnowedin
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Post by vtsnowedin »

johnhemming2 wrote:Companies like Apple may be able to do this sort of thing without repatriating their profits (which means they avoid some tax).
Better then that they can often avoid ALL tax on them.
Say your Daddy Warbucks and have ten million to invest. You buy several growth stocks that are not paying out any dividends.
A year later you have no tax to pay on dividends and you still own your stock. Some of the stocks will be losers but if your any good at picking stocks more will be winners so you made a net growth of 7.5% or $750,000 for the year.
But you don't have to pay tax on that until you sell the stock and pay capital gains on your gain.
Along comes your daughter that wants you to pay $100,000 for her wedding. Now you have to sell some of your stock but what you choose to sell are the ones you lost money on not the winners. The tax on a loss is zero so your daughter goes off into wedded bliss with untaxed dollars.
Now all you have to do is get control of congress to change the tax code to get rid of the estate tax so you can pass on all the winners without ever having been taxed on your profits or Gain.
NO Wait......!!!!!!
raspberry-blower
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Post by raspberry-blower »

Another company that has seemingly hit its peak earnings is IBM as its earnings have been declining for the past 5 years

Wolf Richter: IBM in trouble and desperate hype is required
Wolf Richter wrote: But IBM bravely asserted, as it does every quarter, that revenues from its new “strategic initiatives” were increasing and that therefore its future was bright. Its “strategic imperatives revenue” – its cloud and artificial intelligence business, including its wonder-brand Watson – rose 13% for the year. But it wasn’t enough. It hasn’t been enough in five years to paper over the relentless revenue debacles in its other operations.

So, to placate stock and bond markets, IBM is touting its expense reduction efforts, such as laying off workers in the US and offshoring work to cheaper countries. IBM has been doing this for years.

Some nasty tongues are claiming that this could be the path to irrelevance. Slashing staff to prop up investor enthusiasm during a revenue decline creates a downward spiral, whereby productive people get cut, and thus revenue drops further, and because revenue drops further, more people get cut, and so on, year after year.
With a 25% decline in earnings over the past 5 years makes one wonder how long IBM will continue functioning in its present format. Any interest rate rise and it becomes a prime candidate for Chapter 11..
A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools - Douglas Adams.
cubes
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Post by cubes »

From what I've read IBM has been a dead man walking for the last 20 years. Sooner or later all the stupid decision IBM management have made will catch up to them.

However, I won't miss Lotus Notes <spit>
snow hope
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Post by snow hope »

cubes wrote:From what I've read IBM has been a dead man walking for the last 20 years. Sooner or later all the stupid decision IBM management have made will catch up to them.

However, I won't miss Lotus Notes <spit>
A little ridiculous is it not? Dead men can't walk for 1 year never mind 20 years..... I suppose you need to be careful what you read. :wink:

Funny that Microsoft still run there worldwide business on IBM servers and OS.

And nearly all the cash machines in the world run IBM software - MQ Series.

Just a few facts - but don't let them get in the way with what you have read.... :D
Real money is gold and silver
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