A few financial odds and ends – companies need to invest their cash

I was reading this morning that Berkshire Hathaway stock is now worth $200,000 a share. Of course, investing with Warren Buffett’s guidance has been very fruitful for those who did so. It was noted that he very seldom will repurchase shares from the market preferring to use the funds to invest in his portfolio of companies’ growth. This premise is very telling as I have been a believer that a company repurchasing shares of its stock is sign of weakness and not strength. The fact the Oracle of Omaha has done it only infrequently seems to support this belief. *

Why is it a sign of weakness? To me, it usually means the senior management cannot think of anything better to do with their cash. It also means senior management may be propping up Earnings per Share (EPS) by reducing the denominator, since they cannot improve earnings in the numerator. A higher EPS ratio means they may make their bonus targets. This sounds less than altruistic, and it is, but is also not uncommon. So, if you see a company doing this, you may want to reconsider whether you want to invest in them long term. With that said, there are some more legitimate reasons to do this, but I wanted to offer these thoughts for consideration as you do your homework.

Right now, many companies have been sitting on cash. My thesis is if you cannot think of anything better to do with it, then give it to me through dividends. With interest rates so low, a steady dividend payor tends to be a brand name, highly capitalized company and provides a nice yield. Since the higher dividend payors are more solid companies, it is a way to replace those low paying fixed income investments and retain a modicum of safety. (Please note equity investments are not secure if a company goes belly-up, but my point is solid brand names who are highly capitalized let you rest a little easier. In bankruptcy, fixed income investments are prioritized as debt, so you may still get some money back). Yet, a good investment need not be a high dividend paying company.

I have seen several CEOs cite uncertainty over Obamacare or the tax code as a reason not to invest their cash. On the flip side, I have seen people like Buffett say, uncertainty like those reasons has never gotten in the way of a good idea. Saying it another way, those excuse makers are just that and, their Boards of Directors should be questioning that strategy. Invest more of your cash in your business. You cannot shrink your way to greatness and you cannot just sit on the sidelines. While you may be cutting expenses in some areas, you still need to invest in the higher growth areas in your company. And, even your more mature businesses who are the cash cows, need investment to be maintained. The key is to manage this yin/ yang balance. If you don’t, you may step over quarters payable next year to pick up nickels today. Then, you will wonder why you are not growing.

Finally, do not forget your most important resource, your human capital. Wages have been suppressed during the downturn and people do not have short memories on this. Now that the economy has picked up, people are voting with their feet as company loyalty was killed by the companies themselves. There is a story in New England where a family grocery company fired its extremely successful CEO for investing too much in his people. This company had great performance, paid its people well and had some of the lowest prices in the business. Yet, a disgruntled family member who controlled just over 50% of the shares wanted a huge dividend and fired the CEO when he said no. Right now, this very successful company has grounded to halt as all the employees and many customers have stood by the fired CEO. I have noted before the Nordstrom model which inverts the pyramid, placing customers at the top, followed by those who interact with the customers and shareholders at the bottom. If you treat customers (and those who support them) well, then the shareholders will make more money.

The ending to this story is still being written. But, at the end of the day, you must serve your customers well. You must pay attention to those serving your customers. You must invest in your business to serve your customers in a sustainable and efficacious way. If you sit on your cash, you may just end up with less of everything.

 

* These opinions are those of an investor. I also do not own any Berkshire Hathaway stock. I am not a financial advisor or investment consultant or broker. So, please do not rely on my opinions to make decisions. Do your homework and speak with an advisor to get legitimate counsel from someone who knows more than me and is registered to give advice.

 

 

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One thought on “A few financial odds and ends – companies need to invest their cash

  1. Note to Readers: I should have added one reason CEOs sit on cash is the constant pressure on quarterly results. A CEO may not survive not meeting expectations for more than several quarters, so investments for the long term, while needed, are put off. The buyback of shares is a way of meeting those expectations as noted above, which lead to bonus payouts based on annual targets. But, it goes beyond that. Some do it to survive in employment.

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