Let me preface this by offering a hat top to Jeff Macke from the land of Twitter for taking CEOs to task on moronic buybacks several years ago. Up until that point, I was indifferent on the matter, chalking it up to CEOs doing things to improve shareholder value. However, after taking a deeper look into this issue, time in and time again, share buyback prove to be a terrible avenue for capital. As a point in fact, it’s simply a fucking waste.
More than that, these god damned CEOs are borrowing money in order to execute these buybacks. Think about it, borrowing money in an effort to effect a short term pop in the stock. How fucking stupid are these people?
How perverse were the buybacks last year? How does $1.1 trillion sound to you?
Dick Bove is out with a piece tonight, dropping shit-bombs on bank execs for wasting shareholder money. This a change of pace for Dick, since he’s usually cock-holstering for them. Please read the following.
Approximately 21 of the nation’s largest banks have reported their earnings in the past two weeks. In aggregate, these 21 companies posted 2018 earnings of $154.6 billion. The common equity of these companies grew by a net $2.4 billion over the same time frame.
Implicit in these numbers is that these banks paid out $152.2 billion of their earnings to their shareholders in stock buybacks and dividends. It is believed that they did this because Boards of Directors and managements felt strongly that these payouts would increase the value of their stocks. Not only did this not happen from Dec. 30, 2017 to Jan. 23, 2019, but in every case, but one, the stocks also went down in price.
The return on equity farce
In sum, banks, gave away $152.2 billion, mostly to people who wanted nothing to do with their banks (sold their stock back to the banks) and the banks received nothing in return. Bank managements argue that this is not so. They state, universally, that their returns on equity rose as a result of the stock buybacks. This argument is almost a farce.
Return on equity is just a number on a piece of paper that has nothing to do with cash. To calculate this number a bank divides its net income by its common equity. In the past, if the bank had a high return on equity one would argue that the bank’s growth rate would be high and its price earnings multiple should grow.
These arguments make no sense today. The reason is because the banks are, basically, not reinvesting any of the money they earned back into their businesses. Repeating out of $154.6 billion in earnings they reinvested $2.4 billion in their businesses. This plowback of earnings into the businesses was 0.2 percent.
No business use for the money
Most company managements have publicly argued that they have no use for the money. Others have actually stated that they believe stockholders may have better ways to put this money to use than the banks can.
Really? Am I supposed to invest in a company that cannot find any use for its earnings in growing its business? Is a bank really a great investment if it thinks investors can earn more money than the bank can on bank cash? How about this one? This bank is a solid investment because it cannot find a way to invest incremental funds – really?
The fact is that the bank argument makes no sense for another reason. In the fourth quarter of 2015, the effective Federal Funds rate was 10 basis points. It is 240 basis points today. Simply stated these banks could have earned $3.5 billion more if they held on to their cash.
When pundits scratch their beards as to why bank stocks have done so poorly for 18 months, they may consider what investors know. That is that one invests in companies with positive outlooks for the future. They are not attracted to companies that publicly state that they do not know what to do with their money and so they give the money away. Banks meaningfully lower their earnings growth rates when they give their money away and this does not create enthusiasm for their stocks.
In other words, ROE is a useless metric now, something bankFAGS have been fawning over since the beginning of time. Banks aren’t reinvesting in their businesses — because banks are broken.
As an aside, went skiing this weekend and I’ve been investigating a potential serial killer in the neighborhood.