DAL Buybacks
 

I'm trying to get smarter on this phenomenon - buying one's stock back, using excess cash (or borrowing it), to prop up the stock price and boost EPS. Having poured billions of our resources into buybacks, why isn't the stock higher? When I compare DAL to some major indices over 5 years we've been buying stock back, we underperform significantly. Why? Are buybacks justified with this performance?

5-yr performance of DAL is +39% (nearly identical to GOL at 38%)

S&P 500 is +46%
Dow Jones +53%
Nasdaq +77%

Interestingly, UAL is up almost 91% and LUV is up 85%. FDX is up only 7% and AAL is down 31% over the same time period.

We are beating the FTSE 100 and 250, so at least we're not as toxic as Brexit?!

I'm guessing to reduce dividends paid out.

Many of those other companies (AAL included) have also been spending Billions on their own stock buyback. The general logic is to buy your stock when you feel it's undervalued and you have excess cash without a better plan for investment.
Many an article has been written on both sides as to the efficacy of a company buying back it's own stock with excess cash.
Many see the fact that much of CEO's pay in recent decades has been tied to stock performance thereby clouds Mgmt's opinion of buying back it's own stock to reduce supply and drive up the demand/price.

The reduction in share count and thus higher EPS doesn’t necessarily equate to higher share prices. The cynical side of me believes that since at least some of the executive suites performance/bonuses/compensation is is tied to EPS, they reduce share count and thus EPS to show that they are “performing”.

Another thing to consider is that it’s possible that rather than stock buy backs, they could keep acquiring more 49% stakes than they already are and thus adding further pressure to scope. The other argument is that it should be going toward employee compensation and benefits, but we will certainly have to fight for that.

Nell Minnow has some interesting stuff on corporate governance and her view is that in almost all cases, buybacks are never done to benefit the shareholder and only the executives who benefit most from it. Here is one of her articles.

https://corpgov.law.harvard.edu/2019/02/22/a-capitalists-solution-to-the-problem-of-excessive-buybacks/

Interesting article...[excerpt] "There are two ways to reach earnings per share goals, by increasing earnings or reducing outstanding shares. But only one of those has real long-term benefits to shareholders. Executives do better from buybacks than retail investors, the exact opposite of what incentive compensation is supposed to accomplish. This is not just bad for the long-term viability of the corporations; the agency costs involved undermine the credibility of our system of capitalism."

To think - particularly in this industry - that we have nothing better to do with free cash than artificially inflate EPS is pretty crazy. I dig the suggestion that management should be required to hold stock and options at least 3 (or 5?) years after the most recent buyback.

It really is a rigged system. It’s basically the same as the “no cancellations” game they play. All smoke and mirrors. The other thing is, of course the BOD and management are going to say the company is undervalued. It’s the perfect excuse for buy backs, it boosts EPS, makes them look good, allows them to achieve the target metrics, makes retail investors feel like they’re getting a “good deal” etc. This is the financial system, in general. Smoke and mirrors.

I don't think they'll ever reduce it by as much as the never ending billions in burnbacks.

https://s17-us2.startpage.com/cgi-bi...db79ef6c7e6fdc

While we all would like all of that wasted money put into employee compensation etc, there's also still a pressing need for infrastructure. Its frequently mentioned how much money is spent on AC and needed airport improvements, but until and unless every single gate in the system has awesome, high volume AC then the ship isn't being steered enough. Likewise when we have multipile AC at the same station at the same time departing at the same time (scheduled not diversions) with only one tow bar that can be used, that needs to happen first.

Everyone is blinded by this new era of profits as if its permanent. Its not. In this always highly cyclical industry its very likely airlines burning billions and billions on this worthless B-school accounting trick will rue the days they did it. Or they would if they didn't have platinum parachutes I guess. Remember when SWA had their fuel hedge advantage? What was that worth in total, like one billion or so? They almost took out at least one legacy and bled all the rest deeply for a while.

History will judge the burnbacks very negatively, but that will be someone else's problem (and ours of course).

Excellent article. Stock buybacks signal a couple of things, almost all of them negative.

If big D truly had confidence in it's gold standard LONG TERM business model, they'd shoot to become an S&P 500 Dividend Aristocrat.

Title given to companies who have increased their dividend return to shareholders annually for a minimum of 25 years.

These are not sexy stocks, but if you're a DRIP investor, they're long term gold.

SWA’s fuel hedges were worth 4 to 5 billion and had fuel not dropped overnight from 140 to 40 a barrel they would have taken out two legacy airlines Delta being one of them.

OK so 4-5B. How many billions have we bought back so far? How many billions more to be bought back? In this industry odds are overwhelming (as close to "guaranteed" as anything can be) that when the industry and economic winds shift, we'll rue the day we wasted that much money.

I think DL could have fended off SW because they were really going after USAir and UAL first and formost. If they were successful in destroying either one, the other plus us would have inherited a lot of time to ride it out long after their hedges went away and they would have been the "last man standing" with their mostly 737-700s paying more than 777/Whale pay anywhere else.

But yes it was a scary time. How less scary would it have been if even one of the billion dollar mistakes of the recent past even at that time had instead still remained to pad the operation with vital breathing room?

Way too much emphasis is focused on quarterly numbers and isolated YoY metrics etc, sometimes at the direct expense of long term success and even viability. Maybe the stratedgy when the storm clouds start gathering again will be like the two men hiking who came across an angry bear. One put on his running shoes and the other said "why are you even bothering, you can't outrun the bear" and he said "I don't need to outrun the bear, I only need to outrun you."

I'm sure there's some trailing average graph equation in a textbook somewhere that justifies all of it.

While probably only a byproduct of our business model....id say the hunter is becoming the hunted.

I don't see SW as the hunter anymore though. They are actually a mostly rational competitor now (by necessity) and the cost gap has narrowed substantially.

We're waging a 3 front domestic war (SW/JB/AS) in numerous markets, not even incuding the ULCC's, and absulutely thriving doing it in every domestic theatre of engagement. And we're not even done building our strengths in NYC, SEA, LAX and BOS.

If we build it.....they will come.

Delta has always had great and dedicated line employees. And now a management that understands how to profitably employ the fleet and has directed the effort to create brand loyalty via a superior product.

The results are evident.

Right. We're running a tight ship, but its also during the absolute easiest time in the history of the industry (including the much ballyhooed regulation era) where the difference between absolute genius and complete incompetent management teams is merely a matter of how many billions in profit you're making ATM.

You could literally pull someone out of a phone book and make them CEO and whisper to them "just sit back, relax, **** and don't touch anything and here's your 8 figure salary" and run a profitable airline in almost every casen in this economic environment. The floor of the performance envelope right now is merely one of less profits but still mad profits in all but the train wreckiest of examples.

As for the product, its good but could be better. Not one jetbridge without awesome air and not one station without adequate tugs and towbars. FC meals need improving IMO and we're not where we need to be WRT reliable connectivity and IFE. More work needs to be done with the boarding process. D-0/door closed early needs to be more balanced than it is.

And short sleeves with ties makes ppl wonder why their plane is being piloted by computer programmers from the 70s.

You had me right up to that short sleevee thing....

This is so true. I think it makes old people feel comfortable though. But this is the least of our problems :D

Hmm. As opposed to long sleeves wth ties?

Or full time coat?

I vote for sweaters. That way we can look like a 1960s kids tv show host.

IF that is the case, why do they increase the dividend amount?

Man you have a really short memory.

It can ALWAYS be better. IROPS for example are better than they were pre merger. The airports are still a fustercluck, and there are ways to improve that. Why they haven't as of yet is anybody's guess.

But to state anybody could mark time is on the ridiculous side of the equation

Oh... and are you in favor of jackets year round again? :)

As the song goes...these are the good old days.

Im my memory nothing comes close to what we are experiencing today. Even in previous up cycle economic times. Operationally, organizationally and personally....this is by far unprecedented.

While i credit much of our success to a dedicated employee group that has finally been empowered and equipped with the necessary tools....i am also certain current mgmt would not view changing paint jobs as a legitimate strategy to address failures to meet performance goals.

Nah, just getting rid of the ties in the summer. We never made the decision to base pilot uniforms on old sea faring traditions of yore; that was a decision made a long time ago and we're stuck with it at this point. Fine.

The Navy and Marines wear their summer short sleeve dress Whites/Blues without a tie. Its not that they don't have ties anyway. They don't do it because it looks ridiculous with a short sleeve shirt. No one else in civilized society, government or private sector, does it either. Literally the only time you see such a display is airline pilots and in Dilbert comics.

Maybe we'll be able to rock beards with our ties in short sleeve shirts though. And with any luck, socks with sandals. :rolleyes:

We'll be able to spark a doobie before that happens.

No ties, beards, and doobies...I like where this is going!!

I look at AA's numbers and beg to differ.

I loved the poster.....:)

Denny

Considering how our management compensates themselves, the buy backs fall under one side of the argument.

Buybacks are executive compensation, if it was for investors they would increase the dividend. It's laughable to think an airline can't deploy excess capital.

Here is another paper that echos the opinions of most on this sight. It’s certainly a biased paper, but it’s interesting none the less.

http://rooseveltinstitute.org/wp-content/uploads/2019/02/RI_Buybacks-FAQ_022019-final.pdf

The issue I have is the last part of the paper, with the proposed solutions. A lot of that is government meddling in “private” money, which I am not a fan of, because ultimately it’s up for the free market to decide (at least in theory).

The free market is only a rhetorical concept. That said, government bailouts work. GM, Goldman, etc.

Stock buybacks allow you to increase dividends without increasing the total amount you pay out. $1 mil paid out to 1 mil stockholders equals $1/share. $1 mil paid out to 500k stockholders equal $2/share. You’ve can increase dividend payouts without spending more money by buying back stock. Increasing dividend payouts and buying back stock are both good things.

But in this example you're not including the price paid to reduce shares by 50%. There are over 650 million shares outstanding of DAL stock. It'd cost you about $18B to buy half of those shares back. You can't "increase dividend payouts without spending more money" overall.

Right. That example was for easy math. But the point is buying back stock allows you to spend the same amount of money on dividend payouts and still increase dividends. My argument is against people saying they should just increase dividend payouts. It’s a better investment to buy back stock.

I don’t think you can make an absolute statement that buy backs are a good thing (always). For instance, look at Stamps.com in the last 4 months. It went from $284 to $34 and they were aggressively buying back shares in the high $200s for quite a while. Is it better off for shareholders that they were doing that as a buyback or a dividend? The concept behinds buybacks is a good one, it makes your “slice of the pizza” bigger. But historically speaking buybacks have proven to not be a beneficial use of capital.

The example still holds. It costs money to buy the stock. You don’t just magically reduce the amount of stock and increase dividends. That money could have been used for something else even if it was just a dividend.

No, because the increase in dividend is in no way covered by the decrease of shares of the buyback. That's the scam, when all is said and done, the only benefit is to the exec's participating in the options program, where their awards were based on the higher EPS, and the value not diluted by the share issue. In reality, the shareholders only see a mere fraction of that capital, in most cases in the last decade, long term investors lost money.

End of the day, I'd rather fly my schedule and not take anything home but laundry. They can have all the money, I prefer time off with decent pay/benefits.

There’s value in that, for sure! I don’t get too wrapped up about buybacks, the whole corporate American system is rigged to cater to Wall Street and executives via quarterly earnings. The financial “advisory” industry has also capitalized on that by using it to sell fear and thus, their “expert services” to eliminate all of that scary risk.

I’d love to see corporations switch to annual reporting at most, maybe even longer intervals. That might help to start wiring our society into long term thinking as these quarterly releases are just noise, for the most part (except if you’re stamps.com)

Right.

Because Navy summer Dress Whites and Marine summer Dress Blues is the same thing as hippies smoking doobies at Woodstock as they rage against the establishment or something.

https://s14-eu5.startpage.com/cgi-bi...6791c9029516c7

Holy Cow. That idiot had to poll the audience for that?

... and 29% of THEM got it wrong? I fear for the future of this country.

No, 29% of them wanted to screw with the guy, just like naming a boat, "boaty-mc'boatface". I wish it was 79% zebraforce