My guess is: (1) The long period of relative peace post WW-II and (2) the collapse of the Soviet Union, and (3) the ever-expanding size and liquidity of global financial markets, have led to slowly dwindling cash reserves for all non-financial, publicly traded companies. (Especially if you exclude the most profitable tech companies)
I'd also love to see the trend in cash reserves post 2008 bailouts.
That data might help settle this debate.
Are companies taking advantage of bailout culture?
E.g. there is a social safety net for large companies that doesn't exist for small companies.
As that safety net has formed, has that led to no change in net cash reserves, an increase, or a decrease?
My guess would be that it has led to a decrease.
Because, it seems safe for the largest companies to understand that every 10 years or so, they will need a bailout for unexpected global turmoil. (A war, a man-made disaster, a pandemic, etc.)
This should properly incentivize everyone for the next round. I don't understand why more people don't propose something along these lines.
The answer seems pretty obvious. If you don't believe that any company should be "too big to fail", that's valid, but it's not exactly the situation we have today. Secondly, those shareholders you speak of aren't just a small group of billionaires. Many of these companies make up substantial portions of people's returement savings, not to mention the knock on effects of huge businesses going under.
If those people did the prudent thing, and invested into an index fund, as opposed to picking stocks of companies that are being ran irresponsibly, their retirement savings would, on aggregate, be fine.
I'd rather not have everyone else's retirement-savings-to-be bail out those bad investments.
Index funds go down with the market... but perhaps more importantly, there _has_ been a massive shift to index/ETF trading. You know what that did? Pumped up the market as a whole. Now individual business assessment is less valuable because businesses with crap fundamentals go up and up and up due to index buying. Just another bubble.
2. Haven't they put a lot of people's retirement benefit savings into this kind of stock? I guess that could be an excuse.
Indulging in debt is the American way. Particularly when you can rely on taxpayer financed government bailouts to smooth out the bumps.
So you buy back shares when they are at the 52 week high and sell more shares when they are at the 52 week low... that's brilliant.
Share buybacks make sense for companies with strong balance sheets and little/ no debt load. For example: Apple. They make zero sense for companies with weak balance sheets and tons of debts (e.g. Most of the airlines).
All this "we are doing it for shareholders" tripe is nonsense. Buying back stock at all time highs is the most idiotic thing a company can do because it says the business has no better use for said money, which imo is one of the dumbest conclusions a company can come to if growth is the goal (is your R&D department so useless that giving the money back to shareholders is the best allocation choice? Silly)....I'm including companies with a huge war chest like Apple, they are not an exception to this truth.
Many companies (run by idiots) have concluded that financial engineering is more useful than R&D, these badly managed companies should be left right in front of the "market firing squad" when the market turns against them inevitably... No bailouts.
Because it makes little sense to compare a corporation's finances to your own, especially in a low margin industry, and it would completely stifle growth.
Edit: Why should I, as an individual, be held to a higher standard than a group of individuals who have come together in the name of profit (most of which goes to those at the top) and have limited liability in case of failure?
As to why it's a different standard, it's different for the same reason baseball doesn't use the same rules as water polo. Both sports, but very different.
I'm not here trying to defend poor management, but it's hard to take your "maintain a massive emergency cash fund" idea seriously.
You’re actually proving my point when you say our expenses are high relative to net profits. If we can do it, and still be growing at an adequate pace (we grew earnings at, IIRC, 8% last year), what can’t other companies? Before, you claimed it would stifle growth We have way more software engineers on staff than financial engineers. I find it hard to believe we can do this and other companies can’t. You haven’t given me any reason why they can’t, either.
And, BTW, if repurchased stock is so liquid, why are these airlines crying now? It’s because either they didn’t adequately insure against a systemic risk to their business, or they canceled the shares.
[0] https://www.macrotrends.net/stocks/charts/AAL/american-airli...
https://americanairlines.gcs-web.com/sec-filings
Here's their latest quarterly filing:
[1] https://www.macrotrends.net/stocks/charts/AAL/american-airli...
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[0]: https://www.cnn.com/travel/article/airport-slots-ghost-fligh...
That’s also why you see so often companies with “no profit”. If a company is operating efficiently, they wouldn’t be turning a profit (they’d have already reinvested profit).
Basic profit-seeking capitalism incentivizes companies to either invest in productive areas or to return capital to shareholders so shareholders can invest in more productive areas. Taxes only effect those incentives at the margins, and the past several decades of increasingly corporate-friendly tax reforms don't excuse or justify the decisions that have been made by CFOs.
> If a company is operating efficiently, they wouldn’t be turning a profit
But what's the timeline for gauging efficiency? Any company needing a public bailout even though they had sufficient profit to cover the issue is manifestly not operating very efficiently. The ones taking on debt to fund buybacks are beyond any sort of reasonable justification from a public policy perspective.
We can quibble over the scope of unpredictable downturns, but AFAIU the airlines returned much more capital than would be reasonable in expectations of a 10-year event. 1980s deregulation, 9/11, 2008 recession, and now 2020 pandemic... at some point you can't say that this stuff is "unpredictable" with a straight face. Something always happens, and even if you don't know precisely what or when, it's regular enough that you can substantially insure yourself. There's obvious moral hazard at play here, even though some public support may have been justifiable in this particular case.
Even worse, AFAIU once upon a time airline union retirement funds were major purchasers of airline bonds. There was a sort of quid pro at play that more closely aligned unions and airlines during downturns, as unions were more incentivized than usual to return the airline to profitability through cost-cutting measures. The downside was, at least hypothetically, greater moral hazard--more pressure for government bailouts because more low- and middle-class employees were effected. But these days airlines have increasingly spurned unions and these sorts of arrangements, so any bailout directly lines the pockets of wealthy investors. There should be much less urgency to bailout the industry, especially without an equity exchange.
By your definition any company that didn't see the coronavirus pandemic coming would be not operating efficiently, but the reality is even if your company was operating efficiently your company may be killed by it.
That's like saying a healthy person shouldn't need to be put on a ventilator because if they took care of their body well they wouldn't need it, but the reality is this virus is not something anyone could have prepared for.
Even if they had only kept, say, $20B of that money—reducing their buybacks by less than half—that would surely be $20B they would not now be asking us taxpayers to spot them, and it's possible they would even be able to make a different kind of plan using that $20B to stretch them over at least some significant part of the gap.
IMO the bailout should take the form of an equity investment from the government. Investors get diluted, but the company survives. Government gets a profit if things go well.
Privatizing profit and mutualizing risks is an insane moral hazard, we have to shake it off.
Truly getting rid of the mutualizing of risks would be letting the companies just collapse. But for various reasons (wanting banks, plane flights), we've decided to not do that.
Yet instead of liquidating their assets once their incompetent management hit a sand bar, US tax payers have been required to bail them out with loans and grants.
Or here's a simpler mechanism-- the airline should sell stock to the public markets to raise capital. It's the natural response to running out of money because you spent it buying stock. The fact that this is a market downturn is something they'll have to deal with.
Buybacks increase the share price, which is a typical metric for executives. This leads to a situation where it is in the interest of the exec to increase buybacks in order to drive the price up, even if the company performance is not that good.
Personally, I'm neutral except for this one thing.
I'm tired of corporations doing this, and people making excuses for them. It's all about the free market when they're raking in money and paying off investors, but the second they run into any problem that costs them money they want another bail out or for the government to change the rules in their favor.
This is what everyone means by "privatize profits, socialize losses". Pay back all profits as dividends/buybacks and when losses mount from a recession then get bailed out by the government.
The challenge is that most investors don't bother to do such tracking. And thus most investors are buying stock at prices much higher than they would have originally bought it at.
The enormous majority of US publicly-traded stock is held by institutions who have the resources to monitor the buybacks and sell off stock, if that's what they wanted. Buybacks aren't a scheme where companies or hedge funds make money off careless retail investors.
The main thing is that airlines transfered their capital to their shareholders. So now they have very little. If they want to keep operating, they will have to ask for some more capital, maybe from their shareholders, maybe from others.
They're also making the calculation that the people are leaving the market and selling under value. This makes sense. The market is low right now because of COVID-19, people need liquidity to handle underemployment and low-spending.
Profits are down and money isn't coming in, and treasury stock is an important counter-balancing force on a receding market. Airlines don't see any major opportunity to make money off of new infrastructure, so they're injecting that money back into the economy.
A pet peeve of mine, but you lump together investors and executives together as if having money in the financial markets is something reserved for the elites, and not inherent in every pension and 401(k) plan.
This strategy has already been kneecapped by plummeting share prices, and trying to sell massive amounts of shares right now would only lead to even further diminishing marginal returns.
Airlines are a crucial national infrastructure, and they know this, which is why they've been incentivized not to give a shit about recession resistance. Bailouts are fine, as long as they are coupled with corrective action. Those who accept them should be unable to buy back stock in the future, and required to build up the capital reserves necessary to weather another pandemic.
Bankruptcy.
United Airline's value is not in its people, or its service, or its business model. The value is in its airplanes, its exclusive rights to fly to some airports and lobbying prowess (Ever wonder why flights to LaGuardia don't fly to the west Coast? United).
The creditors who take over United Airlines will not take the majority of these airplanes and send them to another country.
If there is any value to United as an entity at all, Chapter 11 bankruptcy is what they need to go through, not congress. In chapter 11 bankrupcy new creditors will come in and punish the existing investors/executives who got United in this situation.
If United truly has no value, chapter 7 is the way and United's assets will be repurposed the most efficient way possible for United's creditors and the economy as a whole.
I frankly cannot think of a less sympathetic organization.
American Airlines alone has a market cap today of $4.7B.
They could dilute by 20% and stay alive.
Sell stock to raise capital after airline stocks have dropped 70%? Usually you want to raise capital when stocks rise ( like tesla did ).
Also, if airlines start increasing float during a market selloff, it would put even greater downward pressure on their stock price and it would make their financial data ( EPS, etc ) look that much worse.
Your idea is one of the worse things airlines could do, but given their awful track record, they might do it.
Not really. A stock buyback is essentially the same thing as the company parking the money in the bank. It's almost the same financial thing. Shareholders 'own' the $1 in the company's bank, or they 'own' it if it's paid back to shareholders.
Stock buybacks or dividend payouts should basically have a null effect on the value of the company. They are kind of 'neutral' exercises.
Edit: 'null value' obviously taking into consideration fewer shares, i.e. if the company buys shares from the market at market prices, it shouldn't directly affect the value of the other shares it's financially neutral.
If a company parks $1 in a treasury bond during good times, they have that $1 + approximately inflation in bad times.
If a company buys back their stock at $N and then has to sell a large amount of stock at $M for M << N (or take a leveraged loan), then the company is only getting fractions on the dollar of that original $1.
Unfortunately, the scenarios where huge companies really need cash now pretty well overlap with the scenarios where there are huge liquidity shocks and crashing equities prices. Such as a financial crisis or a pandemic.
If every business had to consider every possible risk scenario (WW3?) then nothing would function. We need a kind of 'insurance' that nobody else will provide. The government is well-positioned to do that if they do it responsibly.
These companies are generally not getting free money - they are getting loans, or in some cases the gov. is getting equity. The government could have actually made a profit were they to have held their auto-bailouts a little longer.
The reality is, Auto Companies cannot prepare for an 'apocalypse' in an adjacent, much bigger market - banking.
Credit is the right thing to do to keep that system going, again the government did loose a few billion, but it was small in the grand scheme, moreover, they should have broken even.
There are quite a few social programs provided by gov for individuals, moreover, those are 'freebies'. The gov is not taking a chunk of 'ownership of you' and they're generally not extending loans.
Banks also paid back their loans, the sneaky thing there was when the Fed allowed banks to dump mortgages on them at face value - which was a 'bailout' of banks and home-owners.
Of all the things that drive unfairness and inequality - these are not them. These are generally good bits of intervention.
Low-interest rates that drive massive home inflation is a primary driver of inequality. Lack of some kind of socialized medicine. Lack of reasonable healthcare regulations. Garbage public schools in some areas. Prison Industrial Complex. These are much more obvious areas for reform.
Every financial decision does.
I'm saying that the popular notion of 'stock buybacks' as somehow a 'windfall' for investors is just not really true at all.
The notions that some individual investors are literally selling their stock, but instead of to some other party but the company itself, is not a big deal.
Stock buybacks are a rational and normal part of financial operations not some 'special win' for investors as some of the rhetoric implies.
the repurchased stock can also be held or destroyed on buyback, which affects the timing of the benefits.
and lastly, buybacks are primarily useful to executives for their signaling value (e.g., luring less sophisticated investors into buying).
the benefits are not uniform to every shareholder, especially through time.
How is it a "forced reinvestment"? Buyback requires two parties to the transaction, the company is buying shares, but someone has to sell them. This can be you. It would be forced reinvestment if the company just kept cash and never returned it either through buyback or dividend, which incidentally is what most people grinding against airline stock buybacks seem to be suggesting.
Really, stock buybacks and dividends are mostly equivalent, with the exception of the tax treatment, which is the whole reason why companies increasingly prefer the buyback route.
That it won't ever exactly happen that way means some will win/lose depending on their individual situation, but it should be something approaching a wash on average.
Again - stock buybacks are not 'windfalls' for investors it's just a normal part of financial operation.
The question of how much cash on hand certain businesses should have to have ... is a separate issue.
If the government wants to regulate this like they do banks, well, that's an idea, but I don't think it's the best one, but spurning businesses because they did a buyback last year and are otherwise operating normally is definitely not the right approach.
[1] https://www.bloomberg.com/news/articles/2020-03-16/u-s-airli...