As some of you may be aware, I report average effective tax rates for US companies, by sector, at the start of every year. Yesterday, that data was picked up by the New York Times and has got plenty of publicity since. http://www.nytimes.com/2011/01/28/us/politics/28tax.html?_r=1Today, I have heard from both sides of the debate. from tax lobbyists that feel that the low tax rates reported for some sectors do not reflect reality and also from those who believe that companies in the US don't pay their fair share.Before I dive in, I want to be clear that the tax rates on my website were never...
Buybacks and Stock Prices: Good or bad news?
XYZ Inc., a publicly traded company, has the following characteristics:a. 100 million shares trading at $ 10 a share. (Market cap = $1000)b. A cash balance of $ 200 million, earning 2% a year annualized.c. Total net income of $ 40 million (giving the company a PE ratio of 25 today).XYZ Inc. uses its cash balance of $ 200 million to buy back shares. What will happen to the share price after the transaction?a. It will go upb. It will go downc. It will remain unchangedClassic corporate finance question, right? Let's see what the answer will be at the two limiting extremes: an extremely "lazy" market...
Stock Buybacks: What is happening and why?
S&P's most recent update indicates that US companies, after a pause for about a year after the banking crisis, are back in the buyback game. In the third quarter of 2010, the S&P 500 companies bought back almost $ 80 billion of stock, up 128% from the third quarter of 2009. Note that this is part of a long term shift away from dividends towards buybacks in the United States, as is evidenced by the figure below which reports total dividends and buybacks at US companies starting in 1988:Note that aggregate dividends amounted to $ 100 billion in 1988 and aggregate stock buybacks were $ 50...
How much cash is too much? Looking at Apple
In the midst of lots of news about Apple - Steve Jobs taking a leave of absence and a 78% surge in profits reported today - I saw this news story in the Wall Street Journal. The gist of the story is that a portfolio manager who has about $700 million in Apple's stock feels that it should pay out some or all of its $ 50 billion cash balance to investors. I do not know the portfolio manager mentioned in the article, Mr. Bonavico, and I hope that he was misquoted because what he is quoted as saying borders on corporate finance malpractice.Here is what Mr. Bonavico is purported to have said:"...they...
Herding behavior: Why, so what and what if?
A news story from yesterday's Wall Street Journal on hedge funds and their herding behavior provides a good starting point for this discussion. In summary, the article notes the following:(1) Hedge funds seem to buy and sell the same stocks, at the same time, and track each other's investment strategies.(2) The correlation across hedge funds has increased over time. Hedge fund managers copy each other more than they used to.(3) Hedge funds collectively are under performing the S&P 500 by more and more each year; for 2010, hedge funds generated 10.4% in returns and the S&P 500 earned 15%....
The Facebook Valuation!
One of the biggest stories of the last week was Goldman's $ 500 million investment in Facebook for approximately 1% of the company. Extrapolating from the transaction, we obtain an implied value of $ 50 billion for Facebook, a number that has been making the rounds in news stories over the last few days. There are three questions that emerge from this news story: (a) With private businesses, can you extrapolate from a single transaction amount to an overall value? (b) Why would a company worth billions choose to stay private, when it clearly has the option to go public? (c) How would you value...
