Is There a Problem with Stock Buy Backs?

Is there a problem with stock buybacks or are stock buy backs always bad?

The standard answer is no, there is a place and time for stock buybacks. The problem with a lot of recent stock buybacks is that a lot of them were not done following what I would call the ‘old standards’ on when to do them and were mainly done with the objective of boasting the stock price by reducing the number of shares to boast the earnings per shares. i.e. Less shares for the same amount of earnings means higher earnings per share. The hope was that would cause the price of the stock to rise as a result.

A typical company, especially large ones that have been in business for a long period time, are usually profitable. The company then has to decide and see what to do with its profits. In the past there was an expected order or priority as to what to do with the profits in the following order of logical priority:

1: Save enough cash to last through the next expected downturn.
Companies would make sure there would be enough of a combination of cash plus available borrowing to make sure the company would be able to survive the next recession. Some companies, especially cyclical companies like car companies or heavy industry concerns, would have a plan in place as to what to do when sales started to drop in order to be able to ride out the next economic downturn.

2: Make sure all needed capital spending needed to maintain sales and profits is made. After the company has enough cash saved or available to make it through a recession, a company needs to repair and replace all equipment needed to maintain sales and profits. Without such spending, the companies’ tools, equipment and machinery will simply wear out and their employees will be unable to do the work needed. While companies can put off replacing equipment for a few years, eventually all machinery will break down and be unrepairable, equipment will wear out and completely break leaving workers unable to do work the company needs done. As such, while capital spending can be put off for a few years, it does not ‘go away’ and will eventually have to be spent, maybe in an emergency situation after revenue is lost.

3: Expand operations, invest in new products, research and development for the future; in short, investments in future revenue and profit. Once a company has taken care of a reserve of cash to survive a downturn, and made sure that its equipment is all in order and working, the company can take a look at expansion for the future. As long as the expected long term return on new project, no matter what it is, exceeds the long term cost of financing, then the company should take on and fund new opportunities to increase revenue and profit.

4: Return funds to the shareholders.
Once all of the above three items are done; cash saved for the next economic downturn, done needed capital spending, invested in new opportunities that the profit will exceed the cost of financing; THEN the company should look at distributing PROFITS to the shareholders and decide how to do it. One very important item to note, is that this distribution to shareholders should only be done with PROFITS from the company, NOT from borrowing.

There are two methods to deciding how to distribute profits of the company to shareholders; share buybacks or dividends.

The more ‘tax friendly’ option is a share buyback since the profit on shares held for more than one year would be typically taxed at the lower capital gain rate instead of the margin income rate for the shareholder. The disadvantage of a share buyback is that for a shareholder to get any cash they would need to sell some of their shares, which if done all the time, would result in the shareholder having no more shares. The company could partly offset this problem by doing a stock split from time to time, especially if the price of the shares are rising. In this way, the shareholder could sell a few shares from time to time to get cash but would get more shares that would enable them to sell off a little every once in a while. (It is also possible that a shareholder could use the shares for a margin loan but that is not a good idea since now you have to make sure the shares do not lose their value or you will have to repay the loan.)

The other option is that the company can pay dividends to the shareholders from the company’s PROFITS. Note that I put profits in capital letters since if a company is not generating a profit it should NOT be paying out dividends or doing share buybacks since it would need to be borrowing to make the payments. Borrowing to make payment does not make any sense. People are investing in companies because they want to invest in a business for the future, they are NOT looking to be repaid with, in effect, their own money that put into the company to finance it. i.e. If there are no profits, the company is paying out money borrowed from everyone financing the company, which is NOT the reason people invest in companies.

While a number of companies in recent years are having problems because they made large share buybacks with borrowed funds, most of these companies can work their way out of their situation over the course of several years. As long as they are making a profit, and stop payments to shareholders that are not made from profits, these companies will improve as time goes on, be able to build up a cash reserve, do all needed capital spending, invest in new opportunities and then start to make distributions to shareholders from profits.

It will be a long road for many companies, such as GE, GM or IBM, but it can be done as long as they are making a profit and over time things will improve dramatically.

Good Luck and Take Care,

Louis J. Desy Jr.
LouisDesyjr@gmail.com
Wednesday, November 28, 2018

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Social Security Can Be ‘Fully Funded’ Anytime Congress Decides To Do So!

Various media source keep running stories over the past several years about ‘How Social Security Is Going Broke’, which is entirely true if NOTHING is done to change anything about the system. The problem with such articles is that it is well within our means to make changes to the system at any point and to FIX the problem.

Social Security is basically a ‘pay as you go’ system. People work until retirement age, and then apply to retire and start collecting benefits. Retirees also get a Cost of Living Adjustment (COLA) every year based on the Consumer Price Index (CPI). The full retirement age use to be 65, with people being allowed to take early retirement at age 62.5 and a 25% reduction in the monthly payout, or delay retirement to age 70 and getting an 8% increase in the monthly payment for every year beyond their full retirement age. The full retirement age has been increased a little over the years, such that for many people they do not qualify for full retirement until age 67 now.

The system is called a ‘Pay as You Go’ because current payments for retirement benefits to retirees are paid with money collected from workers at the same time. There is no money saved up from the past to make the payments with. This system of ‘Pay as You Go’ works as long as there are enough people working to be able to make the payments.

When the system was originally started, most people only lived a few years in retirement, meaning that payouts were not for that long, plus there were a lot more workers per retiree years
ago. In past decades the number of workers per retiree was 5 or more; today it looks like the number of workers per retiree may drop to only 2 or 3. This drop in workers per retiree is a problem since the system is a ‘pay as you go’, that means each retiree is only supported by the taxes collected from 2 or 3 workers. As a result, over time, there will be a problem with collecting enough money to keep paying the promised Social Security Benefits BUT it is well within the power of Congress and any administration to fix the problem.

There are many ways the problem can be addressed and a number of web sites that post ‘social security fund’ calculators to show various options and how the changes would effect the situation. C-SPAN’s Washington Journal one morning several weeks ago had a guest on that mentioned the web site at http://www.crfb.org/socialsecurityreformer . Using that social security calculator, my simple options for fixing the problem was two parts: 1: Slow Benefit Growth for the top 70% of earners which would close 58% percent of the predicted gap between tax collection and retirement payments and 2: Subject all Wages to payroll tax which would close the gap by 72%.

These two simple items, that I selected from many, would close the gap by 129%, meaning that the fund would start to run surplus as time went on and build up finds for future generations. This change was a large change from the current course of systematically and slowly drained of all funds and causing a crisis with social security payments.

While there are all kinds of other options that could be looked at or done, this simple exercise shows that it is very well possible for Congress and the Administration to fix the shortfall in Social Security funding at ANY point that they choose to do so; the real problem is that all sides need to get together, compromise and agree to make the changes!

It would seem that the real problem is NOT the funding gap for the social security payments, the real problem is for all sides, Congress and the Administration, to get together, compromise, and pass legislation that would fix the problems for decades to come!

Good Luck and Take Care,

Louis J. Desy Jr.
LouisDesyjr@gmail.com
Monday, November 26, 2018

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Is the future for radio stations online streaming over the internet?

Is the future for radio stations online streaming over the internet or is there still a place for over the air waves broadcasting?

One of the interesting questions related to advertising for media companies is if the future for radio stations broadcasting over the internet or the traditional business model of broadcasting over the airwaves or a mix of both.

Until the rise of the Internet with broadband connections, all radio stations were over the airwaves with all revenue from advertising spots sold, usually as part of a radio program or specific times of day, in an effort to target specific listeners as potential customers.

Prior to the more recent decades, radio broadcasts were all usually specific broadcast programs with the schedules published in newspapers. As television took market share from radio stations, and listeners, as the television networks really expanded in the 1950s, more and more radio stations turned their business model into a ‘music jukebox’ format and away from set programs or broadcasts.

In the current era, most radio stations are doing one specific format; news radio, talk radio, religious station, music jukebox of a specific genre of music, community radio station, non profit PBS station, etc. On top of all of that, most radio stations are now part of a corporate conglomerate where the programs are all feed to it from a central HQ location. This results in the radio station itself is really nothing more than a transmitter being used for its bandwidth in a specific area and the offices of said radio station mostly vacant of any staff except for an engineer or two to make sure the transmitter is working.

One of the ways to expand the reach of any radio station is to do over the internet broadcasting. This change would allow a radio station to reach anywhere there is an internet connection. The problem for all radio stations in the past for competition for listeners was limited to the transmission range of the radio transmitters. Today, as radio over internet gains in popularity the potential for competitors for all radio stations is any station anywhere in the world that has streaming audio over the internet. With much of the content somewhat generic, there may be little to no differentiation for advertisers except for expected market and reach. i.e. Advertisers will look to pay the least amount per potential realistic customer for their product or service. So a local ice cream shop may get no benefit from one million listeners that are so far away that they would never go to the shop where as a manufacturer that has a web site and ships worldwide could care about such potential customers, could benefit from such listeners and be willing to pay to advertise and reach those potential customers.

One of the interesting mix of both ways to get radio is Emmis Communications Corporation NextRadio app. NextRadio App ). All smart phones can get radio over the internet through specific apps from the station, or internet web site links setup for streaming audio to listeners. NextRadio adds an interesting feature to most smartphones in that the chips within most smart phones have the ability to receive over the airwaves radio broadcasts and the NextRadio app allows one to tune them in.

One important note on Apple iPhones is that many Apple iPhones are not able to do this because, at the moment, Apple has deliberately blocked the receiving of FM signals on the phones. Some people speculate that part of the reason for this deliberate ‘crippling’ of iPhones is that Apple has agreed with the phone carriers to force people to get radio broadcasts on iPhones only by using internet broadband. This boasts peoples usage of data, thereby forcing people to pay more each month for the data plans on their smart phone service.

Over time any media that is available on the internet will need to do or make something so it is not generic with all other media it is competing with, otherwise, eventually, its business model will probably fail.

As an example, let us say I setup a radio station, WLOU, and my business model is to go the broadcast over the internet route. I don’t have any content but I find out how to license and legally play music over station WLOU, and then start to sell advertising. Now, my content is nothing special and anyone else that can get the same music is a competitor that is exactly the same as my station. There is nothing special to differentiate WLOU from any other station. Since WLOU has nothing to differentiate it from any other internet radio station, I can probably only compete by pricing my ad spots as low as possible.

Now let us say things go on like that for a few months, and then I decided to start adding my own commentary or editorials for 10 or 15 minutes every hour, in segments of a few minutes at a time. Now WLOU has something that no one else has, me talking. While it may not be a big draw for listeners, it is SOMETHING that no one else has and no other station can get unless I make an arrangement with them. If people want to listen to my commentary, they have to listen to WLOU, and advertisers may now be willing to ‘pay up’ to advertise on WLOU.

That is the challenge for all media companies; what can my company do that differentiates it from other companies that I compete with, so I get listeners, which then bring advertisers and advertising revenue?

The ‘base of’ any of this problem is listeners; if a media company has listeners, advertisers will follow as long as the pricing is right. If a media company is having problems with revenue then there are two things that need to be done: 1: Unique content or market area that will get listeners/readers/viewers/subscribers 2: Lower the advertising rates to more be in line with the amount and type of listeners/readers/viewers/subscribers the company is getting. As an example, if a radio station can’t sell a 30 second advertising spot at $500 to an advertiser, lower the price and see if that will sell. Some revenue is better than none. Once the time for a radio spot passes and nothing was paid for it in that spot, that revenue is gone forever since one can not go back in time.

Hopefully, all media will be able to find their special nitch market and unique content that will allow everyone to make a profit and serve the general public in the best way possible.

Good Luck and Take Care,

Louis J. Desy Jr
LouisDesyjr@gmail.com
Sunday, November 25, 2018

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Can Newspapers Be Saved?

Recently I had been looking around the Internet plus had many discussions with my friend Bob about newspapers and the newspaper business plus media in general. One of the ‘great shocks’ to me is how a number of newspaper and media companies seem to be having all kinds of problems staying profitable or even going out of business. I still find it amazing that there are a number of cities and towns in the United States that have no local newspaper!

As an example of problems newspapers are having, the local paper in my city, The Worcester Telegram, over the years has gone from where they use to have a Washington bureau, to now where the only outlying reporters are within the county and based out of the distribution offices in the towns around Worcester. Where the paper use to have its own printing presses in the main T&G building on Franklin Street, which the company no longer owns or is even based out of anymore, I am told the paper is now printed at presses located far outside of the city. Where the paper used to have its own process and systems for creating the paper, now most of the layout work is all done through a remote computer and software system that The Telegram does not own or even have on site in its offices. Where in the past the paper was completely contained in its main T&G building at 20 Franklin Street, now the paper is just a few floors in an office building after having sold off the 20 Franklin Street building years ago.

The older typical business model for a newspaper was that subscriptions were priced to typically cover the cost of delivery of the paper and the main profit for the operation was the selling of advertisements in the paper. This business model made a lot of sense since the advertising rates would be a function of how many subscribers the paper had; so by pricing subscriptions just high enough to cover the cost of delivery would get a newspaper as many subscriptions as possible. Doing that got the subscriber numbers as large as possible, then the advertising rate would be able to command the highest possible rate since the rate for advertisers would be based off of the number of subscribers.

In recent years this whole model seems to have broken down. I think part of the problem is that people are able to get news online for free, making it hard for newspapers to charge for subscriptions; a declining subscriber base would cause advertising rates to decline which would then cause more problems for any newspaper.

Another part of the problem is competition from other forms of advertising. In the past the media competing for advertising dollars were newspapers, magazines, radio, television and direct mail. Today, advertising over the Internet has taken a large part of the overall advertising market and caused all kinds of problems for all of the old line media companies.

The question today for any newspaper is this; is it possible to somehow stay with the old business model, or maybe transfer to a digital only business model where there is no more print edition of the newspaper but instead an online distribution only? While at first look an online only model would seem to work because of the lower costs of distribution but my observation over the years with magazines and other print publications that went from print editions to online only is that without a printed copy to distribute is that people simply seem to ‘forget’ that the publication is out there, subscribers drop off, and at some point the publication simply ceases to exist.

At the moment it looks like the current still surviving print publications are mostly, if not all, part of large conglomerates that look like they are trying to bring some kind of economies of scale to making and distributing print copies of newspapers and magazines. Hopefully time will tell if this attempt to use economies of scale to keep print publications going will work.

Good Luck and Take Care,

Louis J. Desy Jr.
LouisDesyjr@gmail.com
Saturday, November 24, 2018

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