Reflections on Value

The situation with General Motors can provide an illuminating case study of what the value of a corporation actually is for stockholders. That corporation has existed in one form or another for 100 years. Suppose one held his shares the entire time. What did stockholder receive for the equity investment in common stock ? That only tangible value received is the dividends paid.

What did stock buybacks do for him ? Nothing. Stock buybacks subsidize the sellers of the company's stock at the expense of the long term holders.

This downturn shows that all stock buyback plans are a bit of a scam. Now, just when stocks prices are very low, the companies are cutting back on stock buybacks. And many banks are issuing new shares at very low prices after buying back stock for years at much higher prices.

Dividends benefit long term investors. Stock buybacks benefit traders, hedge funds and speculators at the expense of investors.

What should a company do with its excess cash flows in good times ? That is quite easy. Pay down all short term debt due within 10 years or less. Raise its dividend to a level payable even in poor environment After all, with less debt, more cash flow can be used to pay dividends. Also, overfund the pension fund to give it a cushion for downturns.

In good times a company should have paid down all its short and intermediate term debt and funded all long term assets with a conservative mixture of long term bonds and solid equity. Then it can survive a severe downturn and have resources to make favorable investments then at low prices.

CFOs need a refresher course in corporate finance.

Word of the Day

"Rowel" - noun and verb [$10] - a Mencken word
Rowel means (noun) a spiked revolving disc at the end of a spur; 2. (historical) a circular piece of leather, etc. with a hole in the center inserted between a horse's flesh and skin to discharge an exudate; (verb) 1. to urge with a rowel; 2. (historical) to insert a rowel in.
Quote From "The Impossible H. L. Mencken", page 591 from his Scopes Trial coverage referring to the Scopes jury: "... a trial before a jury of men who have been roweled and hammered by those opponents for years ..."
Sentence: The very highly paid "managers" of US corporations are about to be given a hammering by politicians roweled by an angry public seeking retribution, who in turn were roweled by those managers who cut the pay and benefits of the common man while paying themselves colossal sums for "good management" now seen as a lie and scam.