Deal with a Slow Growth World

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

When I posted, “Living with no growth”, I suggested that we rethink some of our widely held assumptions, which are based on continued growth.

At that time, the most common response from viewers was denial, “no growth, not my world”.

And, to be fair, there’ll be pockets of growth, no doubt, but, in general, the global economy is slowing. There’s no denying it.

So, if you run a company facing this slow to no growth environment, how do you respond? 

Specifically, how do you deal with Wall Street when earnings growth is hard to come by?

The first response of many companies is to cut costs.  Many companies, however, are already running lean and mean so there’s not much room to cut costs any more, and some costs, for example, health and workers comp insurance, just keep rising.

The related response, raising prices is probably a non-starter in the face of today’s softening demand and increased competition.

So how do you keep Wall Street happy? Here are a couple more ideas.

One. Many public companies are initiating or increasing their stock buyback programs.

Last month, companies announced $45 billion in new or expanded stock buyback programs.

Two. Initiate or increase a dividend on your stock.  As I reported in my post Offer Yield Securities – What Investors Want”, increasingly, investors look for current yield if there’s slow or no growth.  And you know, with today’s low interest rate environment it doesn’t take much to offer an attractive yield. 

Three.  Your company could increase its financial leverage.  Your company could raise debt to grow or buyback equity. Borrowing rates are at record lows so you may be able to put the money to work efficiently to make this move pay.

Four. Get economies of scale by combining with another synergistic company.

If you can acquire or merge with a company at a reasonable price, you may be able to give your bottom line a boost by eliminating duplicate costs.

So, the message is, once we recognize that our environment has changed, that global growth is slowing, we can focus on practical responses

I can help you to evaluate your options and take the best actions.  Contact me now.

Timing Stock Buybacks

dennismccarthy@ariesmgmt.com

(213) 222-8260

The McKinsey Quarterly has come out with another interesting article, this time about stock buybacks.

In this article, the authors suggest that most company buyback programs don’t work the way they’re intended, to buy back stock when prices are low.

Most companies end up buying back stock at high prices, not at low prices.

It seems that companies, like many investors, are not good at market timing.

I suppose it’s human nature that companies initiate buyback programs when the company is doing well but the stock price seems to lags the fundamentals.

The irony is that companies typically don’t maintain buyback programs when a company’s situation is less favorable and its stock price has dropped.

The bias, therefore, is to buy back stock only at high prices.

The authors calculated that companies’ buyback programs would have been more successful if applied consistently over time, in good times or bad.

The SEC permits these programs, like 10(b)5 programs, to accomplish what the authors suggest.

I noticed in the article’s footnotes, however, that other academic studies have shown that smaller companies have used one-time purchases, like tender offers, to successfully buy back stock at low prices.

I can help you to evaluate which kind of stock buyback program best fits your company and on setting up the program.

Again, my name is Dennis McCarthy. Please contact me to discuss.  Thank you.

dennismccarthy@ariesmgmt.com

(213) 222-8260

www.capitalmarketalerts.com