Are stock buybacks overhyped?

June 19, 2013

Share repurchases aren’t the magic potions some investors and corporate managements think, according to an analysis of Standard & Poor’s 500 companies in the June 2013 Institutional Investor. Stock buybacks can create value, but they can also destroy value – and the actual results suggest some humility in talking up the advantages.

Cash stackSome institutional investors love financial wizardry. Share repurchases automatically increase EPS by reducing shares outstanding – and send a message of confidence in a company’s stock. So financial engineering fans press the idea on a CEO or CFO more than any business strategy, such as investing corporate cash in growth or new product creation.

And some companies love share repurchases. Now Institutional Investor, working with Fortuna Advisors, has begun publishing a quarterly scorecard of how effective stock buybacks actually are, at least in the large cap world. Based on S&P 500 companies that repurchase more than $1 billion in stock or at least 4% of their market cap, the magazine reports rolling two-year ROI for buyback programs.

You can get the overview in “Corporate Share Repurchases Often Disappoint Investors” or dive into raw data in a table detailing ROI for S&P 500 companies with big repurchase programs. (A majority – 268 of the 488 index members that were public for the whole two-year period – bought back at least $1 billion or 4% of their market value.)

The II-Fortuna analysis calculates ROI as an internal rate of return to evaluate investment performance of cash spent on buybacks over two years, including share value increases/decreases and savings on dividends avoided.

Results suggest investor relations people – and CEOs – may want to be more modest in discussing share repurchase plans. The accounting effects of buybacks are assured, but benefits to shareholder value aren’t:

Returning cash to shareholders is supposed to benefit everybody – at least, that’s how the theory goes. Investors who want cash get plenty; shareholders who prefer to stay the course see higher earnings and cash flow per share …

The fanfare that typically accompanies buyback announcements never hints that poor execution can torpedo more value than accounting-based bumps in earnings or cash flow can produce on their own.

Apple is the magazine’s poster child for the disparity between  theory and reality. The magazine dings Apple CEO Tim Cook for his $60 billion repurchase program, the biggest authorization in history, which he enthusiastically called “an attractive use of our capital”:

Buyback ROI reveals a less ebullient story at Apple than Cook described. The company’s -56.7 percent return on buybacks trails those of all S&P 500 companies that compete in the rankings. Every dollar spent by Apple on share buybacks during the two-year period was worth less than 44 cents. …

Trouble is, companies often buy back shares when the price is high – and as we know, stocks go up and down. Timing is everything, at least for returns over a typical investment horizon of two years. Often the timing is wrong:

“During the downturn in 2008 and 2009, even companies with good cash balances didn’t buy back stock, and now they are buying back shares,” says Adam Parker, Morgan Stanley’s top U.S. equity strategist. “A lot of companies have not done a particularly good job of buying low.”

If you’re interested in more analysis, Fortuna Advisors CEO Gregory Milano offers companies some direct advice on how to approach share repurchases in “What’s Your Return on Buybacks?”

I’d love to hear your feedback on buybacks.

© 2013 Johnson Strategic Communications Inc.

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Buy side half-interested in social media

June 11, 2013

Just over half of institutional investors are using social media to gather intelligence on companies and industries as part of their research, according to a survey released Monday by NIRI and research firm Corbin Perception.

While 52% of 87 buy-side investors surveyed say they monitor social media – not much change from 56% in a 2010 survey - they are tuning into social channels more frequently. Some 39% monitor social media on a daily basis, up from 12% in 2010. Others check periodically or in response to someone calling a specific post to their attention.

The investors say overwhelmingly (92%) that information from social media isn’t entirely reliable – it’s intelligence that helps fill in the “bigger picture.” But most of those who monitor social media say their investment decisions have been influenced at some point by what they see.

The top three categories of social media watched by the buy side:

On down the line in buy-side usage are company blogs, chat boards, Motley Fool, Twitter and so on. Facebook isn’t in the top 10.

One-fourth of the buy-side people surveyed don’t use social media at all for work, and 38% can’t access social media sites on work computers because of company policies against it.

The bottom line for IR, according to NIRI and Corbin:

As social media continues to evolve, IR professionals must closely monitor company-specific social media content. That said, when it comes to getting their company story our, one-on-one meetings, the investor presentation, analyst days and conference calls remain the leading sources of reliable information, according to the buy side.

Corbin provides a copy of the survey report on its website.

So where are you in monitoring and/or engaging with social media?

© 2013 Johnson Strategic Communications Inc.

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A pile of dirt and a vision

June 10, 2013

Pile of Dirt2

Sometimes progress looks like a pile of dirt. It’s true of the big construction project starting to take shape. And the biotech company laboring through long years of development to get to market. And the out-of-favor, battered management putting in place a new strategy.

Caught in the snapshot of today’s pervasively short-term thinking, progress often looks like a pile of dirt. When the current financial results aren’t pretty, investors can see an ugly mess – or something entirely different. This brings us to our role in investor relations.

One of our tasks in IR is to communicate the vision to investors – to show the prospective owners the architect’s rendering and give form to what today may seem like a pile of dirt. That vision must begin with the CEO, of course. But the IRO is one of the primary messengers to ensure that others see and understand the picture of the future.

Here are a few thought-starters on how we can do it:

  • Acknowledge the present state. If the past six quarters have been ugly, say so. If the development project has moved more slowly than hoped, admit it. People will give a company credit for recognizing the same pile of dirt they see – and having a plan to get beyond it.
  • Focus on the future state. Any presentation, report or web content should talk more about what is coming than what just happened. I’m referring to  emphasis, not the number of words, because of course we need to give ‘em the facts about the company and its performance. Clear accounting results are essential to disclosure and IR – point is, we can’t leave it there. Even past accomplishments are data points for talking about where we are heading, because investing is about the future.
  • Lay out the plan. Executives building a great enterprise – whether developing a medical breakthrough or transforming operations or rolling up an industry through M&A – sometimes don’t clearly explain what they’re doing to those outside. In IR we should be laying out the process so investors know the steps involved in building value. And, of course, then we will tell them each time we complete a step along the way.
  • Give the microphone to the CEO. It’s his or her vision, so challenge the boss to paint the picture of the future. A CEO speaking to investors about nothing but quarterly results seems like a wasted opportunity. Since most CEOs are giving the best part of their lives to a company, they need to share with others the vision that drives their enthusiasm.

What about you – do you have any favorite ways of showing how the company is building value when current results may look like a pile of dirt?

© 2013 Johnson Strategic Communications Inc.

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The phone call no IRO wants

June 8, 2013

As a non-lawyer, I always pay heed when an attorney for a client speaks. Certainly when a letter from a law firm or government agency arrives (though most are friendly). And when the phone rings and a caller says he or she works for the SEC or FINRA, well …

In 20-plus years of IR work, I’ve never personally heard from a regulator. But a piece in the June/July issue of NIRI’s IRupdate, “What to Do When You Get ‘The Call’,” caught my eye. And it’s worth noting.

The advice of the lawyers NIRI cites comes down to this:

… if you are the one to get the call, it’s not hard to know what to do: Basically, it’s say little and listen a lot …

Be polite but reserved. Neither hostile nor chatty. Don’t volunteer details or opinions. Your goal at this stage is to gather information to give your general counsel or securities lawyer – who can then manage the process. Ask the caller what the focus of the inquiry is, if it relates to a specific event, time  or person. Then head for your company lawyer’s office.

This seems like good advice to me. Any reactions?

© 2013 Johnson Strategic Communications Inc.

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What’s your theory?

June 7, 2013

THEORYThe classic question “What builds value for a company?” often finds its answer in a strategy. But that’s the wrong answer, Todd Zenger, a professor of business strategy at Washington University, argues in the June 2013 Harvard Business Review. The right answer, he says, is the corporate theory. The distinction matters to IR professionals who influence messaging on shareholder value.

In “What Is the Theory of Your Firm?” Zenger says value does not come from strategy, at least not military-style plans for targeting attractive markets and conquering your rivals (“competitive advantage”):

Unfortunately, investors don’t reward senior managers for simply occupying and defending positions. Equity markets are full of companies with powerful positions and sluggish stock prices.

What Zenger calls the theory of your firm is a view of life that runs deeper than any particular strategy:

Essentially, a leaders’ most vexing strategic challenge is not how to obtain or sustain competitive advantage – which has been the field of strategy’s primary focus – but, rather, how to keep finding new, unexpected ways to create value. [The corporate theory] reveals how a given company can continue to create value. It is more than a strategy, more than a map to a position – it is a guide to the selection of strategies.

Three kinds of “sight” go into a corporate theory, Zenger says:

  • Foresight: beliefs and expectations for the future of an industry or its customers
  • Insight: deep understanding of what is rare, distinctive and value in your company’s assets and activities
  • Cross-sight: ability to spot complementary skills or assets that will fit together to create something new

Apple is one example Zenger cites. With PC makers chasing cheaper, faster and bigger computers that basically were interchangeable, Steve Jobs took a different view of how to create value. It was a theory:

… essentially it held that consumers would pay a premium for ease of use, reliability, and elegance in computing and other digital devices, and that the best means for delivering these was relatively closed systems …

This theory guided Apple into a wide range of markets:

Apple was not the first to design a digital music library, manufacture an MP3 player, or market a smartphone. But it was the first to craft and configure those devices and their user environment with elegant, easy-to-use devices and with tight control of complementary products, infrastructure and market image.

So what’s your firm’s theory? One way to find out is to often ask, Why?

Why this, and not that? Is a particular view of the future driving your CEO’s choice of strategy? Does a unique set of assets or skills energize success, across products or markets? Is a novel perspective leading your company to build or acquire new skills and assets to drive growth?

As Zenger suggests, a good theory not only guides a business; it gives power to the value creation story. And if investors buy your theory – well, they buy. We investor relations people should always seek to better understand – and better explain – how our companies are creating value.

© 2013 Johnson Strategic Communications Inc.

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Guiding expectations: Of course we do

May 9, 2013

It’s as close as possible to unanimous: 97% of investor relations professionals say their companies attempt to manage expectations of shareholders, according to a survey of corporate members of the National Investor Relations Institute (NIRI).

No surprise, really. The results published today by NIRI just affirm the definition of IR as cultivating accurate understanding among investors of a company’s business, performance and prospects – communicating all that goes into valuing a stock.

IROs said the biggest focus (61%) is on guiding expectations for the current year, with smaller numbers of companies focusing on longer-term expectations.

What approach do companies use to manage expectations? Some 70% release financial metrics such as goals for revenue, margin or earnings; 27% offer “micro” industry-level metrics; and 22% give “macro” business-environment expectations.

Most CEOs and CFOs know instinctively that their job includes painting the clearest possible picture of the direction and prospects of the business. Exactly how to manage  expectations varies greatly from company to company – and executive to executive. You’ll find details and examples in the NIRI survey – and other sources.

As to the imperative of communicating with the market, it’s unanimous: We all do.

© 2013 Johnson Strategic Communications Inc.

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3 common mistakes in small-cap IR

December 29, 2012

Small-cap company boards should help CEOs and CFOs face the difficulties of connecting with investors and analysts, governance adviser Adam Epstein argues in a roundtable on investor relations (“Communicating with the Street: Addressing Small-Cap Challenges”) in the Nov-Dec 2012 issue of Directorship magazine.

Here, for example, are three prevalent mistakes that small caps make in IR:

  • “A failure to communicate clearly with an appreciation for the audience [emphasis mine]. … A mix of small, growth-oriented institutional investors and retail investors typically owns shares of smaller public companies, and many lack technical educations and backgrounds. Accordingly, communications with the Street will resonate with only a small portion of investors unless that technology-speak is simplified and more emphasis is given to what most small-cap investors care about—growth and financial performance.” (David Enzer, Roth Capital Partners, small-cap banker)
  • Small-cap habits that “destroy management’s credibility [emphasis mine] and make investors run for the hills and on to the next opportunity: One, a failure to communicate on a consistent, scheduled and timely basis, regardless of whether the news is good or bad. Two, a failure to translate non-GAAP metrics into GAAP metrics, e.g., no one except management knows what ‘orders’ or ‘bookings’ means in terms of revenue. And three, chronically overpromising and underdelivering.” (Timothy Keating, Keating Capital, small-cap investor)
  • “A systemic failure to treat investor relations as a strategic imperative [emphasis mine] … Electing not to put the proper investor relations policies and procedures in place to offer management the opportunity to present a cogent business plan, with proper forward guidance to targeted investors and analysts, will all but guarantee life in the ‘boundary waters’ of Wall Street for small-cap companies.” (John Heilshorn, Lippert/Heilshorn & Associates, IR consultant)

IR is about the basics, in other words. CEOs and CFOs of smaller companies, especially, tend to be so focused on daily demands of running the business that they don’t devote the time or resources needed to communicate well. Where boards can help is by identifying a lack of engagement in IR – and encouraging more. It takes commitment to identify your audience, speak their language and explain who you are. And more commitment to maintain a consistent, proactive outreach.

Although the Directorship piece focused on small caps, commitment to excellence in IR really is the issue with many companies – from micro-cap wannabes to global mega-cap giants.

© 2012 Johnson Strategic Communications Inc.

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Google gags on Q3 snafu

October 18, 2012

In the “Things Could Be Worse Department,” an investor relations nightmare struck Google Inc. today: Not only did third-quarter 2012 earnings decline and miss expectations, an unfinished draft of GOOG’s Q3 release was filed prematurely on the SEC’s EDGAR website, triggering a big sell-off before trading was halted.

“I think this is probably the worst technical screw-up I’ve seen in an earnings release in 20 years. I can’t think of anything as bad. I mean, clearly this was a premature release – it was put up on EDGAR prematurely. It even has boilerpate text in it that says, ‘PENDING LARRY QUOTE,’ “ said Bloomberg contributor Paul Kedrosky, a Kauffman Foundation fellow and blogger at Infectious Greed. ”The result, however, combined with how poor the numbers actually are, is pretty dire.”

Oh, yes, pretty dire. GOOG closed down 8% on nearly five times average volume, a haircut of about $20 billion for shareholders. No telling whether the stock price would have reacted as violently if bad earnings had been released in a more orderly way – say, after the market closed.

So Google is the lead news story on all the financial sites – with headlines like “Google results, filed by mistake, miss; shares dive” (Reuters), and “Live: the Google Earnings Disaster” (live blogging on WSJ.com). And, of course, the tribulations are even trending No. 1 on Google Finance.

The erroneous press release from EDGAR may become a collector’s item, something to post over your desk as a warning:

It will take time to sort out what all went wrong. Google blamed the early release on R.R. Donnelley, the financial printer that does a lot digital work for IR departments. No doubt there will be further statements and explanations.

For now, what is certain is that “Google – October 18, 2012″ will become a case study for investor relations officers in the future. A case of what not to do.

And each of us working on Q3 earnings for other companies should remember, “There but for the grace of God go I.”

© 2012 Johnson Strategic Communications Inc.

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Trading at the speed of light

August 10, 2012

The rapid meltdown of Knight Trading, whose nifty new software went berserk last week and racked up $440 million in losses in about 30 minutes, immediately reignited the debate on high-frequency trading and how to regulate it.

Many investor relations professionals already held automated trading in contempt. Algorithms, derivatives and lack of fundamental reasons for buying or selling leave IR out of the picture – and focusing on milliseconds seems like the ultimate short-termism. Really, hypertraders care about tiny price moves, not companies.

Since there isn’t much “warm and fuzzy” in high-frequency trading, critics are quick to blame quants and computers for all the perceived wrongs of the stock market. Personally, I’m skeptical of attempts to regulate this kind of trading out of existence. I prefer a free market approach, with losses for players who make mistakes as Knight did – and rewards for smart investors or traders.

The most interesting piece I’ve read since the Knight Trading fiasco was not in the financial papers, but in Wired Magazine: “Raging Bulls: How Wall Street Got Addicted to Light-Speed Trading” is somewhat critical of high-frequency trading:

Faster and faster turn the wheels of finance, increasing the risk that they will spin out of control, that a perturbation somewhere in the system will scale up to a global crisis in a matter of seconds. “For the first time in financial history, machines can execute trades far faster than humans can intervene,” said Andrew Haldane, a regulatory official with the Bank of England, at another recent conference. “That gap is set to widen.”

This movement has been gaining momentum for more than a decade. Human beings who make investment decisions based on their assessment of the economy and on the prospects for individual companies are retreating. Computers—acting on computer-generated market trend data and even newsfeeds, communicating only with one another—have taken up the slack.

What I found most interesting are the insights science writer Jerry Adler offers into the mechanics behind making our computer-driven marketplace ever faster and faster. If you like tech, read the Wired piece: This is science fiction becoming reality in the capital markets where we labor as IR professionals.

Technologies continue to advance, trading times are still accelerating and we probably haven’t seen our last scary moments in the stock market. To most IR people, super-fast trading is just “noise.” To me, it’s a very different kind of investing – not for me, but not a phenomenon I want Congress to try to ban. Politicians could wreak unintended consequences by trying to codify whether 15 or 20 milliseconds is too fast, 5 or 10 simultaneous orders are too many and so on.

An IR professional, I think, should stick to the job: Understanding markets for the company’s securities, telling the story to investors who do have an interest in the business and its value, and building relationships across the capital markets.

What’s your take on computerized trading and what it means for IR?

© 2012 Johnson Strategic Communications Inc.

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One message is better than five

June 8, 2012

Ken Segall, a creative ad man who worked with Steve Jobs through the heyday of building the Apple brand, has an idea worth considering in investor relations:

Minimize your messaging.

Segall came up with the “i” in the iMac brand (which led to iPod, iPhone, iPad …) and worked on memorable campaigns for Apple and other leading companies. Segall’s book Insanely Simple: The Obsession that Drives Apple’s Success came out this spring and is a good read for people involved in telling their companies’ story.

“Think minimal” is an idea at the core of Apple’s simplicity, Segall says. For example, Apple offers five choices of computers rather than dozens of variations sold by HP or Dell. Segall spoke Thursday at the Mid-America Corporate Growth Conference hosted by Association for Corporate Growth in Kansas City.

Minimalism works in getting your message across, too, he says. From the book:

Human beings are a funny lot. Give them one idea and they nod their heads. Give them five and they simply scratch their heads. Or even worse, they foreget you mentioned all those ideas in the first place.

Minimizing is the key to making a point stick. … Your point will be more quickly understood, and more easily remembered, if you don’t clutter it up with other points.

When talking to investors, our temptation in IR is to unleash a tsunami of facts. More details in the earnings release, more slides, more bullet points, more pages. We want to overwhelm doubts by flooding people with every piece of information.

Though Segall’s expertise is in marketing consumer goods, he’s right when he urges us “Don’t bury your fact in facts.”

Segall tells a story of discussing an ad with Steve Jobs for an iMac computer. Jobs considered four or five major facts critical to the ad – and thought 30 seconds was plenty of time to make these key points. Segall’s ad-agency boss, Lee Clow, tore off several sheets of paper and wadded them up into little balls.

Taking one ball, Clow said “Here, Steve, catch,” and tossed the ball to the client – who caught it. “That’s a good ad,” Clow said.

“Now catch this,” the ad man said – tossing five balls at once across the table. Jobs couldn’t prevent paper balls from bouncing all over the place – and caught none. “That’s a bad ad,” Clow said. And Jobs was convinced.

So next time we’re working on the quarterly release, or slide deck for the road show, let’s try to remember. As Segall says:

People will always respond better to a single idea expressed clearly. They tune out when Complexity begins to speak instead.

Yeah, yeah, I know. In investor relations, we have a lot of information we must get across to the audience. A lot, even, that we’re required to communicate. But the principle of simplicity holds true. Advice we should heed: Less is more.

© 2012 Johnson Strategic Communications Inc.

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