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Old 06-12-2019, 04:17 PM   #1  
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Default 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?!
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Old 06-12-2019, 04:50 PM   #2  
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I'm guessing to reduce dividends paid out.
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Old 06-12-2019, 05:54 PM   #3  
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Originally Posted by TED74 View Post
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?!
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.
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Old 06-12-2019, 08:11 PM   #4  
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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/
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Old 06-13-2019, 12:15 AM   #5  
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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.
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Old 06-13-2019, 04:42 AM   #6  
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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.
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Old 06-13-2019, 07:10 AM   #7  
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Originally Posted by RAH RAH REE View Post
I'm guessing to reduce dividends paid out.
I don't think they'll ever reduce it by as much as the never ending billions in burnbacks.



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).
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Old 06-13-2019, 08:02 AM   #8  
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Quote:
Originally Posted by mispoken View Post
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...sive-buybacks/
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.
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Old 06-13-2019, 09:38 AM   #9  
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Originally Posted by gloopy View Post
I don't think they'll ever reduce it by as much as the never ending billions in burnbacks.



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).
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.
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Old 06-14-2019, 06:08 AM   #10  
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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.
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