Former Vice President Joe Biden has urged all American CEOs of public companies to forego share repurchases over the next year as part of the fight against the coronavirus.
“I am calling on every CEO in America to publicly commit now to not buying back their company’s stock over the course of the next year. As workers face the physical and economic consequences of the coronavirus, our corporate leaders cannot cede responsibility for their employees,” Biden tweeted March 20.
President Trump has said that he would be okay with a ban on share repurchases as a condition for American businesses seeking bailouts from the federal government. That’s a complete turnaround from his administration’s previous argument that buybacks put money back into the economy.
Now that it looks as though the economic stimulus package is on its way to getting passed by Congress, any company seeking a bailout will have to agree to halt their buybacks for the duration of the assistance plus an additional year after the loans have been repaid.
T]And while shareholders haven’t complained, the reality is that buybacks have hurt numerous large companies because that money could have been used to pay down debt and to save for a rainy day.
Well, the rainy day is here, dressed up as the coronavirus.
Companies Hurt By Buybacks: Exxon Mobil (XOM)
I recently was on the receiving end of some angry comments from readers, presumably, Exxon Mobil (NYSE:XOM) shareholders, because of my March 11 article, “Investors Shouldn’t Touch Exxon Mobil With a 10-Foot Pole.”
First, let me say that I wouldn’t wish stock losses on my biggest enemy. I’ve made plenty of mistakes in my career writing about stocks. I’d be the first to congratulate those wishing me ill if XOM were to take off on a trajectory to $100. I just don’t think that’s going to happen.
A March 25 article in the Globe & Mail March 25 reinforced my belief. I’m not the only one who thinks fossil fuels are going the way of the dodo. But I digress.
Beyond sector-wide headwinds, XOM’s long history of buybacks has hurt the company’s future by wasting capital that could have been used to pay down debt at a time when oil prices are hurting every company except Saudi Aramco.
Between 2006 and 2015, Exxon Mobil repurchased $210 billion worth of stock. That’s $21 billion a year. The company suspended its buybacks in 2016, but it should have discontinued them in 2006.
In 2014, Exxon bought back 136 million shares of its stock for $13.2 billion. That reduced its share count by 3.1%. It paid an average price of $97.06 a share, 61% higher than its current share price.
If that money were put to debt repayment, Exxon would have half as much debt. And that’s just a single year of repurchases.
As we’ve seen with the airlines, it’s all good until it isn’t.
United Airlines (UAL)
I recently wrote about United Airlines’ (NASDAQ:UAL) abysmal capital allocation policies.
Of course, I could easily have substituted UAL for one of the other big airlines. They’ve become a lightning rod against share repurchases. But that happens when you use 96% of your free cash flow on share repurchases and then cry wolf.
The stimulus package is supposed to ensure that these addicts can’t dip into the cookie jar until repaying Uncle Sam. If I had my way, I’d go back to the days when share repurchases were illegal. You don’t have to go very far back. They were made kosher in 1982 during the Reagan years.
Care to guess how many large-cap CEOs celebrate the day Reagan came into power? 100%.
Anyway, if you look at United’s recent share repurchases, the bought back $1.6 billion of its stock in 2019 and $1.2 billion the year before. It paid an average of $76.29 a share, 51% more than where it’s currently trading.
How many billions in grants and loans do you think United is going to ask for? My guess is $2.8 billion.
Simon Property Group (SPG)
I just want to say upfront that I’m generally favorable about Simon Property Group (NYSE:SPG) and the job CEO David Simon has done during an incredibly difficult period for mall owners as retail transitioned to an omnichannel experience where online played a much more significant role.
However, Simon’s family holding company owns 8.4% of its stock, which means it benefits more than anybody from a smaller share count.
Over the past two years, Simon repurchased $713.9 million of its stock at an average price of $159.35. That’s 60% more than its current share price. When so many retailers are failing, that doesn’t seem like the best use of its capital.
In this instance, I’m not suggesting that it should have used the funds to repay debt. Instead, I think it would have made a nice cushion to help out some of its retail partners that have been unable to open their stores in recent times.
Over the past two years, a $714 million addition to its cash would more than double what it currently has on its balance sheet. In these challenging times, it could have made a difference.
Boeing (BA)
Earlier in March, I suggested that Boeing (NYSE:BA) could climb back into the $300s by June or July once the 737 MAX was back in the air. On March 24, reports surfaced that the company planned to restart the plane’s production in May.
I would think the coronavirus has put any hopes of a July restart in jeopardy. However, sources say it’s asked suppliers to have parts ready in April, so you never know. Indeed, if Trump had his way, Boeing would be flying by then.
CFO Greg Smith said recently that the company is badly in need of some assistance because it’s been frozen out of the credit markets.
In the past two years, Boeing repurchased 33 million shares at an average price of $354.55 a share, $54% higher than where it currently trades. With $27.5 billion in long-term debt outstanding as of the end of December, that $11.7 billion used for buybacks could have been a handy self-finance tool.
A big part of my bullish sentiment toward Boeing in the past has leaned heavily on its free cash flow generation. Assuming everything returns to normal by the end of 2020, I expect that tap to resume flowing.
However, at no time did I ever suggest it should go big on stock buybacks. I didn’t and I won’t. It’s not cheap making planes. Boeing needs all the cash it can get its hands on.
Chevron (CVX)
I don’t believe any oil and gas company, no matter how solvent, should be buying back its stock at a time when the world is transitioning to alternative energy sources not derived from fossil fuels.
At best, Chevron (NYSE:CVX) can hope that the Saudis give up their desire to rule the global oil market. They won’t. Or they can conserve cash to ensure that they can survive when oil prices occasionally drift down to $15 a barrel where only Saudi Aramco can make money.
I recently suggested that Chevron stock becomes much more attractive if it refuses to use its free cash flow for share repurchases over the long haul, thus avoiding the fate that’s befallen the airline industry. Capital allocation is everything.
In that article, I pointed out that Chevron repurchased $21.75 billion of its stock between July 2010 and the end of 2018. Chevron paid an average of $111.08 a share for its stock over those eight years. That’s 38% higher than where its shares are currently trading.
And while it’s not quite as poor a return as Exxon’s managed with its repurchases, it’s still a terrible waste. I hope, for the shareholders’ sake, that it’s learned its lesson about over-the-top share repurchases.
Ford (F)
In July 2017, I wrote a story that questioned why Ford (NYSE:F) wasn’t buying back its stock. I mean, if it was as cheap as some people thought — it was trading around $12 at the time — the smartest thing it could do would be to invest in its stock.
As Ned Ryerson (Groundhog Day) would say, “Am I right, or am I right?”
Seriously, though, I’m the guy who said buybacks ought to be outlawed. If I thought it made sense, surely it did. In hindsight, we know that it would’ve been a severe mistake on Ford’s part. Trading at $5.40 as I write this, it would have been another kick in the groin for the long-suffering automotive manufacturer.
It makes me want to double down on my dislike of share repurchases. That’s because you’re damned if you do and you’re damned if you don’t. Rarely, unless you’re Apple (NASDAQ:AAPL), do you win at the share repurchasing game.
The last time Ford made a big buy of its stock was 2014. It paid just less than $2 billion for 116 million of its shares.
That’s an average price of $17.24 a share, 69% higher than its current stock price. Ouch.
Marriott International (MAR)
TopHotelNews published an article in April 2017 that says all you need to know about Marriott International (NYSE:MAR) pivoting to an asset-light business model after paying $13.3 billion for Starwood Hotels and Resorts the previous September.
“We are proud to announce the sale of this iconic resort property [Westin Maui Resort and Spa] and to expand our portfolio with our strong global partners, Trinity and Oaktree,” said Leeny Oberg, chief financial officer of Marriott International. “The sale demonstrates the strength of the Westin brand and reaffirms our commitment to our asset-light strategy as we continue our merger integration.”
The acquisition gave Marriott more than 30 hotel brands and 6,000 rooms. That’s good news. However, as a result of the purchase, Marriott’s long-term debt jumped from $3.8 billion in 2015 to $8.2 billion at the end of 2016. It finished 2019 with $10 billion in debt.
Yet, Marriott spent $2.3 billion on its stock in 2019 at an average price of $132.95 a share, 36% higher than its current share price. In February 2020, despite the fact the coronavirus had already reared its ugly head, the company bought back $150 million of its stock at $145.42, paying an even dearer price for its shares.
And now it wants a handout? Please. Marriott didn’t have to buy Starwood, adding all that debt. Marriott didn’t have to blow almost $2.5 billion on share repurchases, but it did.
What about its capital allocation screams asset-light?
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
