STI - Short term incentives (1/4ly bonus)
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The shares they own have not gone down in value–but a mega-pot of money was spent just to “break even”. Good idea–or not?
GM stock may be relatively flat over the past few years but it isn’t for lack of trying on the part of the CEO and board, who had an existing “opportunistic stock buyback” program previously authorized to spend up to $3.3 billion that was raised to $5 billion in 2022. By February 2023, GM had bought back roughly 60 million shares. During that time, the stock was trading for between about $32 and $40 so conservatively, GM spent about $2.1 billion of the $5 billion reserve. The stock is currently trading at $33.75, lower than the $36.86 it was trading at on December 1, 2010.
It is possible that had GM not been pursuing those buybacks, their stock would have slid substantially, spooking more investors to sell off and triggering more demands to “do something” that would have triggered more union and management job losses.
However, it is also possible that any such buybacks didn’t calm any concerns in the investor community but simply starved internal projects needed for plant redesign, tooling changes or core drivetrain redesigns of cash, delaying the point at which GM has a revamped product line further into the future.
Stock buybacks make sense IF a company is extremely profitable, has great margins, a high barrier to entry and operates with relatively stable technology that doesn’t need to be replaced or become completely superseded by multiples of efficiency. Buybacks put the extra cash into the hands of those who truly OWN the cash – the shareholders. They also inhibit the urge of arrogant CEOs to begin “diversifying” into other businesses they know nothing about.
Stock buybacks make ZERO sense in an industry like the auto industry which is subject to interest rate cycles that can dry up demand (and cash flow) in a quarter, has products with four year development cycles, uses capital that requires 5-10 years of consistent operation to make economic sense and is undergoing an external shock that requires nearly 100% retooling of plants and products. In the case of GM, they appear to be a tool management is using to smooth out volatility in the stock price to disguise the underlying issues with their current operating model and the performance of management.
WTH
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Maybe it’s exclusively FBO management? We have seen boards increasingly packed with cronies of management, and management. The WalMart board has three Walton heirs, as well as the CEO. When a board member criticizes management’s effectiveness, which is what the board is supposed to do, the board member is tossed (see what happened to Jessie Upchurch when he questioned the effectiveness of the Tandy/Radio Shack CEO) Shareholder votes are increasingly viewed as a nuisance by management. The number of shareholder proposals that management requests the SEC to omit from the proxy is increasing. I have posted before about shareholder proposals to require the company to disclose who it bribes, why, and how big the bribe was. Management’s response is always that who management bribes is none of the shareholder’s business. Management is increasingly acting like an unaccountable law unto themselves.
One of my friends recently commented that the two stocks he has never made money on are AT&T and Ford Motor, but the honchos continue to rake in the loot.
Steve
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Looking at this UAW strike dispassionately, I see a few things, all of which are possible.
- The UAW leaders believe that the “big 3” aren’t so big anymore, and are becoming even smaller. Therefore, for the next 5 or 10 years, they want to extract as much as possible for their members. After that, who knows? Maybe the big 3 become the big 2 or the medium 2? And heck, maybe 5 to 10 years can be stretched to 15 years with more government money. And for a significant percentage of the older UAW folks, that’s just enough time to tide them over to retirement.
- Stellantis isn’t really a big 3 anymore, it’s not really a US company anymore. And no matter what the next contract contains, they will probably slowly close down their US factories and reduce UAW employment with time.
- GM and Ford are both mismanaged to an extent, but a lot of those decisions are kind of forced on them. For example, they could choose to build small cars, but they will at best break even on them, and will probably lose money overall. AND, doing models of small cars will distract them from their EV effort, and redirect development money from their EV effort. It’s like they’re between a rock and a hard place.
- Spending more on labor, and they WILL surely be spending more on labor, will also redirect funds from their EV effort. But perhaps government will hand over a few more billion to support it. After all, it’s an election year next year.
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I don’t agree with this at all - I understand the concept - I have many stocks that are engaged in buying shares back; it may or may not keep the share price stable, it may or may not increase the share price - but it does not put any cash in my hands! Dividends put cash in my hands and I would much prefer them.
JimA
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As offered in another thread, anyone think management cares about small shareholders, at all? Maybe a couple huge mutual funds can get the time of day out of management, but not the rest of us. Management tells us what they do is none of our business.
Steve
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A subtle, but very valid point. In order for a buyback to benefit an existing shareholder, they have to sell shares to become a former shareholder, in which case the firm is rewarding their least committed investors. Paying a dividend returns cash to ALL shareholders, in equal proportion to their share of ownership. Of course, doing so tends to committ the firm to a more consistent outlay, which again many execs are reluctant to do if they are not confident in quarter-to-quarter cashflows. Purchasing shares on the open market whenever the CFO decides to dip into the market gives the CEO and board much more lattitude to smooth out the share price by buying on dips and provide an illustion of stability in the stock price that underlying performance isn’t necessarily supporting.
WTH
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Keep in mind that the ONLY way to provide employees, including union members, access to ESOPs and ESPPs is to either buy the stock through various programs or issue NEW stock. Certainly dilution would have a more negative impact on stock price than open market purchases for the benefit of employees.
If GM and other companies did not perform buybacks, then they would likely have to eliminate any stock ownership program for the employees at all levels - and instead of investing that money in capital improvements, it would likely have to go to other forms of compensation and retention.
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They should be making continuous and ongoing investments in capital improvements, unless they plan to go out of business.
Buying corporate shares to fund retirement programs may not be a good investment for the beneficiaries. Remember Enron?
Warren Buffett would disagree. Buying back stock (in theory) increases the share value and gives the stock owner a choice to sell some to get cash and pay income taxes on it or not. Paying a dividend requires stockholders to pay the tax in the current year whether they want to or not (assuming share not held in IRA/401k.) This same tax liability flows down to mutual funds that hold the shares.
Mike
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Keep in mind that the ONLY way to provide employees, including union members, access to ESOPs and ESPPs is to either buy the stock through various programs or issue NEW stock. Certainly dilution would have a more negative impact on stock price than open market purchases for the benefit of employees.
Also very good point. But… I would expect those purchases to be considered more “routine treasury operations” the CFO performs as part of normal cash flow management across both operations and personnel expenses. When buyback programs get announced, they tend to be announced not as part of SEC filing obligations but as part of big press releases along with other “strategic” announcements like executive shuffles or actual departmental reorganizations. Almost like the execs are promising shareholders the thing we’re doing right now is such a game changer that we’re gonna push all the extra cash freed up back to you.
WTH
Your key words are ‘in theory’. And qualified dividends are fine. And I have much of my stuff in a Roth. But still; you have to sell shares to see the benefit of a stock price increase due to buy backs. So it is not ‘cash in my hands’; it is potential cash at some point in the future assuming the price doesn’t fall off a cliff because the company is not investing in itself or it’s employees. I would much rather they give the money to employees (not stock) instead of buying back their stock.
JimA
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But stock buybacks are probably the preferred choice if the company isn’t going to do that. In other words, if the company is going to return cash to shareholders, then buybacks are the better way to do it - because they offer tax advantages compared to dividends. If you return a billion dollars through a dividend, everyone has to realize income on it (generally - obviously some folks hold in tax protected retirement accounts and the like). If you return a billion dollars through a buyback, people who want to convert that to cash by selling a proportionate amount of their shares can do so - but those who don’t want to can choose not to.
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You win an RS story. Looking over the quarterly report one day, this was sometime in the late 80s. I noticed that net earnings were down, but, son-of-a-gun, the “JCs” in Fort Worth had bought back just enough stock that quarter for EPS to be up. Pretty smooth, eh?
Steve
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As I said, I understand the concept and the implications for me and other people. The statement was ‘buybacks put cash back in my hands’ and that is really not true unless the stock value rises and I decide to sell. Cash in my hands means “Cash” in my hands that I can use to invest or buy food, and qualified dividends are very nice. As is cash in my Roth. Even in my Trad I can use the money to invest in other companies without having to touch the money invested in that company.
JimA
As an aside - you do realize that it used to be illegal for a company to buy back its own stock, right?
JimA
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Which made absolutely no sense. A company funds itself via a combination of debt and equity. It makes no sense to say that equity can only go up, while debt can fluctuate as needed. Nowadays most companies like to maintain a debt to equity ration within a given range, and will adjust either one to reach the desired range.
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You can decide to sell whether the stock rises or not. When the company buys back 1% of its stock, you can maintain your exact same proportional ownership of the company by selling 1% of your shares. While this might (in theory) result in a higher stock price, typically the shares being repurchased are a small enough percentage of the float that any changes would be swamped by day-to-day volatility - especially since share repurchase programs are implemented over time.
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Of course it makes sense and the people who initially formulated the rules had experienced the manipulation of the stock market in this way. Apparently those who do not study the past will continue to make the same mistakes! As Steve noted above: “I noticed that net earnings were down, but, son-of-a-gun, the “JCs” in Fort Worth had bought back just enough stock that quarter for EPS to be up. Pretty smooth, eh?”
Same with getting rid of Glass-Steagall - banks should do one thing! We are not learning from our mistakes.
JimA
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