Sunday, October 28, 2012

PE Ratios and Dividends Around The World

According to FactSet, the country with the lowest PE ratio is Russia at 5.22 times, while Mexico has the highest PE at 26.90 times. The PE ratio in the U.S. is about 15.20 times. In addition to Russia, Italy and New Zealand are the only countries with single digit PE ratios, while Mexico has the only PE ratio above 20. India's stock market has a dividend yield of 1.33 percent, while Spain's average dividend yield is 8.43 percent. By way of comparison, the average dividend yield on U.S. stocks is 2.18 percent.

Saturday, October 27, 2012

No Greek Haircut

German Finance Minister Wolfgang Schaeuble announced that a "haircut", or restructuring, of Greek debt would not be possible. The Greek government had asked for a haircut on the country's debt, in this case a by reducing in the coupon rate and extending the maturity of Greece's debt. Schaeuble stated that refunding, or buying back outstanding bonds and replacing them with new debt, was a possibility.

Friday, October 26, 2012

Microsoft Wins Treasury Award

Microsoft has more than $1 billion in cash flowing through the company each day, so working capital management is a very important task. Recently, the company was awarded the Alexander Hamilton award by Treasury and Risk. Microsoft's working capital team worked on ways to improve cash forecasting. The team was able to reduce forecasting variances by 50 to 70 percent each month, resulting in a drop of over $200 million in the cash balances of subsidiaries.

Thursday, October 25, 2012

Crowdfunding A Startup

A new potential source of financing for small businesses seems to be growing closer to reality. Crowdfunding, or small investments by many individuals, was part of the JOBS Act, which was enacted in April 2012. The new law will allow individual investors to invest in startups through the Internet. Although crowdfunding has been passed into law, the SEC must still set the rules and regulations for these new "exchanges". Investors in crowfunding must be accredited. For an individual, this means more than $1 million in net worth or more than $200,000 in income for two of the past three years. A recent article for small business owners explains some of the rules, drawbacks, and taxes for crowdfunding.

Wednesday, October 24, 2012

M&A Down, Insurance Coverage Up

In the first half of 2012, mergers totaled $929.4 billion, down about 22 percent from the same period in 2011. At the same time, M&A insurance has increased. Policy limits for M&A insurance rose to $2.3 billion, a 35 percent increase. M&A insurance typically pays off if a seller misrepresents the position of the company. Such misrepresentations can include financial statement errors, errors about the customers of the company, or lying about the status of lawsuits or potential lawsuits. The buyer then may be able to file a M&A insurance claim for up to two years after the transaction.

The Board Versus The CEO

At one time, a company's Board of Directors was viewed as a rubber stamp for the CEO. Recently, Boards have become more active in the management and control of the company. Citi CEO Vikram Pandit resigned last week after a clash with Citi's Board and in 2011 Yahoo's Board fired CEO Carol Bartz. Other companies that have lost CEOs or Board Chairman leaving because of discord include American International Group and Hewlett-Packard. A recent survey indicates that 21 percent of Board Chairman in 2011 were independent, up from only 10 percent in 2006. Other factors cited which may be leading to the increased activism of Boards includes the recent financial crisis, increased regulation, and fear of investor lawsuits.

Tuesday, October 23, 2012

Cash Balances

When things get risky and uncertain, cash is king. Many companies seem to be following this advice. In fact, the cash balance for the S&P 500 companies is approaching $1.5 trillion. CNBC recently compiled a list of 10 cash rich companies. For example, Priceline has $2.4 billion in cash, which is 63 percent of the company's assets, compared to an industry average of about 20 percent. And Altera Corp. has $3.44 billion in cash, which is 80 percent of assets, compared to an industry average of 27 percent.

Monday, October 22, 2012

The NPV Of A College Degree

While there has been debate about the cost of a college education, any analysis of cost should include both all outflows and all inflows. A recent article from Brookings discusses both the cost and financial benefits of a college degree. The Hamilton Project found that the return on a college degree doubled the stock market return since 1950 and is more than five times the return on corporate bonds, long-term government bonds, gold, or home ownership. The average IRR of a college education since 1950 was 15.2 percent. Since 1976, the IRR has fluctuated between 14 and 18 percent. In 1980, the NPV of a college degree was about $260,000 at a 5 percent rate and the NPV grew to more than $450,000 for someone starting college in 2010. Although the text deals with capital budgeting in a corporate context, remember that capital budgeting techniques can actually be applied any time a financial decision is being made.

Wednesday, October 17, 2012

Share Repurchases Set To Rise?

With the potential tax increase on dividends, the potential for smaller dividend increases offset by increases in share repurchases exists. If capital gains are taxed at a lower rate than dividends, capital gains should be preferred by investors. Another interesting point in the article is the reference to the performance of stocks in companies that follow through with share repurchases. Such companies have outperformed the market as a whole, which may indicate that share repurchases, when completed, give a similar signal as dividend payments.

Tuesday, October 16, 2012

Dividends Are Here To Stay

Why do companies pay dividends? According to finance theory, investors should be indifferent to dividends or capital gains assuming equal taxation. And when dividends are tax disadvantaged, investors should prefer no dividends and the subsequent increase in capital gains. Professor Douglas Skinner, an accounting professor at the University of Chicago, discusses the dividend puzzle. As is noted in DeAngelo, DeAngelo, and Skinner (2004), the top 25 dividend payers account for more than one-half of all dividend payments. Skinner points to continued dividend payments as a result of: 1) The signalling power of dividends. That is, dividends are a strong signal that the firm will continue to be able to pay dividends. 2) Dividends reduce the ability of managers to squander cash. 3) Widows, orphans, and regulations that force large institutions to invest in dividend paying stocks. As Dr. Skinner points out "Although we haven’t yet established the reason, the data are very clear: Dividends, even though they remain a puzzle, are here to stay."

Presidential Capital Budgeting

In September 2010, President Barack Obama spoke to A123 Systems Inc. CEO David Vieau and Michigan Governor Jennifer Graham about the opening of a new electric car battery plant in Livonia, Michigan. President Obama proclaimed that “This is about the birth of an entire new industry in America -- an industry that’s going to be central to the next generation of cars.” Unfortunately, the results from a new project can be wildly different from capital budgeting projections. Today, A123 filed for bankruptcy protection. Part of the reason for A123’s bankruptcy lies in the fact that the government targeted sales of 1 million electric vehicles by 2015, but as of September 2012, only 50,000 electric cars have been sold in the U.S. A potential suitor for A123 is Wanxiang Group Corp., China’s largest auto-parts maker. Such a bid would likely result in car batteries made in China, not the U.S., a stated goal of U.S. government support of A123.

Monday, October 15, 2012

Starbucks And U.K. Taxes

A common criticism of the U.S. tax code is that corporations do not pay a fair share of taxes on income. But this is more widespread than just the U.S. Since 1998, Starbucks has earned over £3 billion ($4.8 billion) in revenue in the U.K. yet has paid only £8.6 million pounds ($13.44 million) pounds in taxes. There is no indication that Starbucks has done anything illegal, but it has used the U.K. tax code to its advantage. Overall, Starbucks has paid 13 percent tax on its international operations. One way companies as diverse as Starbucks and Google avoid taxes is to charge subsidiaries for intellectual property from a business that is domiciled in a tax haven country. The second method used is that the coffee sold in the U.K. is roasted at a subsidiary in Amsterdam, which sets the price it charges U.K. Starbucks. A final method is inter-company loans. A subsidiary in a low or no tax country makes a loan to a subsidiary in a high tax country. The borrower can deduct the interest payments, but the low tax subsidiary pays little or no tax on the interest income.

Saturday, October 13, 2012

Mutual Funds Underperform The Market

Although many professional money managers and investors would like to think that they can beat the market, the evidence is against this belief. New research shows that for the 12 months preceeding June 2012, the S&P Composite 1500 outperformed 89.84 percent of all actively managed U.S stock funds. For the prior three years and five years, the percentages were 73.24 percent and 67.72 percent, respectively. Mutual fund performance is even worse for bonds funds with 93.62 percent of actively managed long-term government bond funds trailing the Barclays Long Government index. These percentages lend support for the stock (and bond) market being semistrong form efficient.

Thursday, October 11, 2012

Porsche Sued Over VW Acquisition

Back in 2008, Porsche made a failed acquisition bid for Volkswagen. Although two lawsuits have recently been dismissed, a new lawsuit has been filed by the family of industrialist Adolf Merckle. Merckle committed suicide after several of his investments, including a short position in VW, turned sour. Merckle's family is arguing that Porsche camouflaged its potential acquisition of VW and secretly purchased VW shares. When the potential acquisition was announced, VW shares shot up, forcing Merckle and other short sellers to scramble to cover the short positions.

Tuesday, October 9, 2012

Net Income Is Fiction, Cash Flow Is Fact

With all of the regulation regarding regarding financial reporting, including Sarbox, you might conclude that the earnings reported by a company would be precise and correct. However, recent research indicates that 20 percent of companies manage earnings. Managing earnings in this context means that companies may under-report earnings in one quarter to offset potential down earnings in future quarters. In a recent interview, Dr. John Graham discusses the results of his research and suggests that a more important measure of corporate performance is cash flows. While earnings can be manipulated through accounting choices, cash flow is much more difficult to manipulate.

30-Year Bond Issuance Rises

Companies are issuing 30-year bonds at a frenetic pace. So far in 2012, about $92 billion worth of 30-year bonds have been issued, more than in any full year since 1995. Companies are issuing long-term bonds because investors are willing to buy because of the almost non-existent short-term yields, and companies are locking in the low long-term yield. The investment grade YTM for 30-year bonds is at 2.77 percent, down from over 7 percent four years ago. Comcast recently sold $1 billion in 30-year bonds at 4.45 percent, compared to the 6.5 to 7 percent range the company had paid a couple of years ago. This resulted in a $20 million annual savings on interest payments. Even General Electric, which hadn't sold 30-year bonds for five years, issued $2 billion in 30-year bonds.

Friday, October 5, 2012


For the year, 105 IPOs have been priced, more than the 96 that were priced in the same period in 2011. IPOs have raised $36.1 billion, 23.4 percent more than in 2011. On the downside, 50 IPOs have been cancelled during the year, the most recent by Dave & Buster's. Over the past nine years, an average of 55 IPOs have been cancelled each year, with 2008 seeing 103 cancellations.

Thursday, October 4, 2012

Sprint Down And Down

Yesterday Deutsche Telekom, parent of T-Mobile, announced that it was entering negotiations to purchase MetroPCS. The stock price of telecom rival Sprint, which backed out of the acquisition of MetroPCS earlier this year, fell on the news. Today, a report by Bloomberg announced that Sprint was considering a counter-bid for MetroPCS. So what would you expect happened to Sprint shares on this announcement? The stock fell by an additional 3 percent. One interpretation is that the market views a T-Moblile/MetroPCS merger as a negative for Sprint, but a Sprint purchase of MetroPCS as even more negative, possibly because Sprint may be forced to overpay for MetroPCS in a bidding war.

Wednesday, October 3, 2012

U.K. Department of Transport Fails Finance

Sir Richard Branson's Virgin Trains, which has been operating a British railway line since 1997, recently lost on a bid to continue operating the line until 2027. So Virgin Trains sued over the decision. In the buildup to the court case, the U.K. Department of Transport (UKDT) retracted the offer to run the line by rival FirstGroup. So why the the UKDT back down? While the reason given was vague, it is probable that the UKDT did not properly evaluate the cash flows it would receive from the winning bid. As the article states, it seems likely that the UKDT did not discount the back-end loaded payments which made FirstGroup's bid appear larger than Virgin Trains.