Reuters blog archive

from Breakingviews:

Why buybacks should be banned

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

“Charlie and I favor repurchases when… its stock is selling at a material discount to the company’s intrinsic business value.” It takes courage to contradict Warren Buffett on matters related to investing, but the Berkshire Hathaway boss is leading investors up the wrong path with share buybacks.

Over the last decade, buybacks made up 60 percent of quoted American corporations’ total cashflow to equity holders, according to Thomson Reuters Datastream. It is easy to see why companies go for them. They usually pump up growth of reported earnings per share, cut back on shareholders’ tax payments and are more flexible than dividends.

But the thinking behind all of those advantages is muddled. In reality, the price of a buyback doesn’t affect whether it is a good idea or not. Buybacks should be eliminated, not endorsed.

from Breakingviews:

European CEOs should avoid starving capex for divis

By Robert Cole

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Corporate Europe is struggling to grow earnings as fast as it has been raising dividends. That could lead to a squeeze, and some tricky decisions about how companies use their cash.

from The Great Debate:

The dark side of bank dividends

In April, U.S. banks dusted off the dividend again, a trick they’d mostly abandoned during the financial crisis. JPMorgan Chase plans an 8-cent-per-share hike. Wells Fargo’s will be 5 cents. Same for Morgan Stanley. Bank of America will raise its dividend a penny. Some might celebrate the move: The banks are back! But there’s more to it. In this fairly anemic economy, dividends are yet another strategic, if counterintuitive, hedge that won’t get our loved and loathed financial institutions lending again anytime soon.

Although good news for shareholders, the payouts don't mask the reality that banks are still unstable. Executives are scared of looming regulatory schemes, such as the Brown-Vitter bill in the Senate, that could raise equity requirements to cushion the excessive debt of borrowing-prone banks. While earnings are up, balance sheets are deceptive. The big banks still rely heavily on income from the stock market, which overall has been stronger, and take in about $83 billion in subsidies. Their equity and cash reserves are a tiny fraction of their debt.

from Reihan Salam:

To create growth, unleash the invisible foot

Across the political spectrum, there is a growing recognition that while short-term battles over government spending are important, they would be far less ferocious and intense if our economy were growing at a faster clip. But while conservatives and liberals alike clamor for more growth, they disagree about how to produce it. The key is unleashing what the economist Joseph Berliner once called the “Invisible Foot,” the neglected counterpart to Adam Smith’s “Invisible Hand.”

Before we turn to the Invisible Foot, let’s think through the prescriptions for growth offered by Democrats and Republicans. President Barack Obama and his Democratic allies often argue that substantial increases in public investment will deliver robust growth. Republicans, in contrast, emphasize the notion that reductions in marginal tax rates will spur growth by increasing the incentives to work and invest. These approaches are obviously far apart, yet they face at least two common obstacles. First, the aging of the population and the high cost of health entitlements severely limit the government’s ability to increase spending or cut taxes. Second, advanced economies have by definition already taken advantage of the most obvious sources of productivity growth and so are forced to innovate to find new sources of productivity growth. And innovation is a trial-and-error process that is far more expensive and arduous than simply following the leader.

from Breakingviews:

Dividend reform won’t fix China SOE money-go-round

By John Foley

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

China’s elaborate money-go-round starts and ends with its cash-hoarding state-owned enterprises. So a plan to make them pay bigger dividends sounds promising. Still, if the goal is to return cash to the people, there is a long way to go.

from Breakingviews:

The 1 pct find a way to stimulate themselves

By Agnes T. Crane

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The wealthy in America are creating their own personal stimulus. Special dividends are coming thick and fast. Oracle’s Larry Ellison and the Walton family of Wal-Mart Stores are among the noteworthy beneficiaries. Payouts have potentially saved recipients billions in taxes so far. Uncle Sam might have put that to work fixing infrastructure.

from Breakingviews:

Corporate America fears taxes more than recession

President Barack Obama is seeking input from Corporate America on the so-called fiscal cliff. But whatever company honchos may be saying about the risk of recession in 2013 if tax hikes and spending cuts kick in on Jan. 1, it looks as if they actually fear higher taxes more than a downturn.

Exhibit A is the recent flurry of special dividends, including a $3 billion whopper announced on Wednesday by warehouse retailer Costco. Data group Markit says 112 firms so far this quarter have already pulled the trigger on special dividends. They include casino operator Las Vegas Sands, which will send more than $1 billion to Mitt Romney’s pal Sheldon Adelson, his wife and the trusts the billionaire controls. Markit expects 20 more firms to do something similar before the year is through.

from The Great Debate:

When customers are angry, how do companies justify shareholder payouts?

As tens of thousands in the New York metropolitan area remain powerless amid a massive cleanup campaign after Hurricane Sandy hit the region, Consolidated Edison, the utility that powers about 3.3 million customers in New York City and Westchester County, reported earnings and reaffirmed its guidance for 2012. Kevin Burke, Con Ed’s chairman and chief executive officer, said that the company was devoting all its resources to aiding Sandy’s victims. The company’s bottom line, though, seems secure, despite the costs of cleanup.

New York Governor Andrew Cuomo has promised that regulators will scrutinize Con Ed’s preparations for Sandy, as well as its subsequent attempts to restore power in the New York City region after the hurricane. Con Ed operates as a regulated monopoly in the region and owns extensive infrastructure that no competitor could duplicate. Not only would it be far too expensive for any potential rival to enter Con Ed’s territory, it would be impossible because of the logistics of ripping up many sections of the city to install new underground lines and then hook them up to every building. The few competitors Con Ed has use the giant’s grid to deliver power.

from Global Investing:

Yield-hungry tilt to equity from credit

For income-focused investors, the choice between stocks and corporate bonds has been a no-brainer in recent years. In a volatile world, corporate debt tends to be less sensitive to market gyrations and also has offered better yields -- last year non-financial European corporate bonds provided a yield pickup of  73 basis points above stocks, Morgan Stanley calculates.

But, long a fan of credit over equity, MS reckons the picture may now be changing and points out that European equities are offering better yields than credit for the first time in over a decade. (The graphic below compares dividend yields on non-financial euro STOXX index with the IBOXX European non-financial corporate bond index. The former narrowly wins.)

from The Great Debate:

Why the bank dividends are a bad idea

On the basis of "stress tests" it ran, the Federal Reserve has given permission to most of the largest U.S. banks to "return capital" to their shareholders. JPMorgan Chase announced that it would buy back as much as $15 billion of its stock and raise its quarterly dividend to 30 cents a share, up from 25 cents a share.

Allowing the payouts to equity is misguided. It exposes the economy to unnecessary risks without valid justification.