On Thursday, Potash Corporation announced that it will increase its stock repurchase program to up to 10% of the shares outstanding at this time. First, let's note that a planned stock repurchase program does not necessarily mean a single share will be repurchased. The company can repurchase the shares at whatever target price they may have decided. The question is, if I were a shareholder (which I'm not, and I have no position in this company), is this the best plan for the company?
I certainly don't believe this makes the most sense for the company. First of all, the company would need $5b cash based on current market capitalization to buy back 10% of the company. the company only has about $250m cash according to its last quarterly report (as per Google finance). This shows that, in order for the company to complete this repurchase program, at current prices, they would need to borrow the funds to buy the shares off the market. Therefore, current shareholders would basically be mortgaged to buy the selling shareholders. The cost of such a move could be tremendous. The company would essentially be buying shares and leveraging the company in the process - what shareholder or bondholder would want such a move to take place?
Finally, I take an issue, as a value investor, to this type of transaction for any company - if the company is a growth company, and the belief in the market is that Potash is, then shouldn't the company use its cash proceeds to continue to build or purchase the capital infrastructure necessary to mine more potash out of the ground, and increase revenues? If not, why should the stock price be maintained at this level, and why shouldn't all shareholders benefit immediately from the company's apparent success? In my opinion, the best use of funds in a growth company, if it has no better use of funds (when it has excess cash - which Potash doesn't even have) would be to pay a special cash dividend for all current shareholders, rather than mortgaging the current shareholders for the ones exiting from the company. Only time will tell if this move by Potash bears the fruit that the board and CEO intend for it to do.
Saturday, September 13, 2008
Whirlwind Weekend for the Stock Market
On Friday, the stock market settled relatively flat ahead of one of the most crucial 48 hour periods of the last 30 years for the financial markets.
First, a hurricane, half the size of the Gulf of Mexico is making landfall over Galveston, Texas, with reports of levee breaches in New Orleans, and causing 25% of North American refining capacity to be shut down. This has already been felt at the pump, as gasoline around Toronto (where I live) increasing $0.12 to $0.13/litre, and increases of over $1.00/gallon in many states across the U.S. It will be interesting to see whether this impact will be long-lasting, or another short term spike to oil and gasoline prices as it continues to plummet.
Second, and probably more impactful to the financial world, it appears that Lehman Brothers is up for sale, and will probably not make it past the weekend unless someone buys the company out. The real significance is not the fact that this is a Bear Stearns re-dux. The real significance is that this may represent a watershed moment for the U.S., as the Federal Reserve and Treasury allow Lehman Brothers to fail, or at least avoid assisting any party in the buyout process. With Bear, Fannie and Freddie, the Treasury and Fed backstopped the bailouts, allowing the assets to be taken over in a more logical and streamlined way. Should the Fed and Treasury allow Lehman to simply fail, this will at least cause asset prices across the markets (equities, bonds and others) to fluctuate dramatically, and, worse case scenario, could cause a catastrophic domino effect across the financial sector.
In these times, it takes alot of courage to stand in the face of such turbulence in the markets, and like the calm before Ike struck Texas, the markets (overall) showed very little signs of any impending implosion. This market has become a forced test on all investors of their conviction and their ability to stay the course. All I can advise is that these are the best times to learn about yourself, and whether you truly have the right asset allocation to stomach the most volatile of times.
First, a hurricane, half the size of the Gulf of Mexico is making landfall over Galveston, Texas, with reports of levee breaches in New Orleans, and causing 25% of North American refining capacity to be shut down. This has already been felt at the pump, as gasoline around Toronto (where I live) increasing $0.12 to $0.13/litre, and increases of over $1.00/gallon in many states across the U.S. It will be interesting to see whether this impact will be long-lasting, or another short term spike to oil and gasoline prices as it continues to plummet.
Second, and probably more impactful to the financial world, it appears that Lehman Brothers is up for sale, and will probably not make it past the weekend unless someone buys the company out. The real significance is not the fact that this is a Bear Stearns re-dux. The real significance is that this may represent a watershed moment for the U.S., as the Federal Reserve and Treasury allow Lehman Brothers to fail, or at least avoid assisting any party in the buyout process. With Bear, Fannie and Freddie, the Treasury and Fed backstopped the bailouts, allowing the assets to be taken over in a more logical and streamlined way. Should the Fed and Treasury allow Lehman to simply fail, this will at least cause asset prices across the markets (equities, bonds and others) to fluctuate dramatically, and, worse case scenario, could cause a catastrophic domino effect across the financial sector.
In these times, it takes alot of courage to stand in the face of such turbulence in the markets, and like the calm before Ike struck Texas, the markets (overall) showed very little signs of any impending implosion. This market has become a forced test on all investors of their conviction and their ability to stay the course. All I can advise is that these are the best times to learn about yourself, and whether you truly have the right asset allocation to stomach the most volatile of times.
Sunday, September 7, 2008
Fallout from Freddie Mac and Fannie Mae Bailout
The historic bailout of Freddie and Fannie will have immense implications for the financial world, and will probably cause tremendous anxiety in the markets over the coming weeks. The mere fact that the U.S. government is now on the hook for $6 TRILLION of U.S. mortgages does not bode well for U.S. treasuries or the U.S. dollar. But, the market may see otherwise. The dynamics of such an event are so complex - the real importance of such a bailout is this: short-term, dramatic government intervention can buoy or destroy market confidence, but, in the long-run market and financial fundamentals prevail.
Always stay the course during hectic times in the market, even if your head or heart tell you otherwise. Market psychology plays an important role in making you money, and not losing your shirt.
Always stay the course during hectic times in the market, even if your head or heart tell you otherwise. Market psychology plays an important role in making you money, and not losing your shirt.
Friday, September 5, 2008
Getting your financial health check-up
One of the most important things to do to move towards your financial dreams, no matter whether you obsess about money (like me) or just want to get your priorities in order, is to develop a financial plan and an investing/saving strategy. The biggest thing problem I have witnessed is that many are in denial or even downright ignore their financial future.
Many are overwhelmed with just simply starting their financial plan. I have often heard people say that they are "scared" to prepare a networth statement, or a monthly income statement. I often tell these people (friends and co-workers) that, justlike getting your car "checked up", or just like you get an annual "check up" with the doctor, it is definitely important to get your financial check up. The key is just to act!
For many, simply adding their bank accounts, their investments, their home and investment properties and deducting all liabilities is as simple as logging into one or two bank accounts online, and throwing a few numbers on an Excel spreadsheet. Yet, why do people not actually do this? FEAR! They fear knowing that they are not financially secure, or that they have more debts than they can afford.
The fact of the matter is this: no matter whether you review your financial health or not, your financial condition is what it is. The real fear should be ignorance itself - you can only develop a plan when you know your starting point. Without a roadmap, you can't get to your destination. The same holds true with your financial health.
To conclude, make sure you check your financial health every quarter to see how you stand, and what you need to do to keep yourself on track. If you are more obsessive, maybe check monthly. A little work will go a long way to achieving your financial goals!
Many are overwhelmed with just simply starting their financial plan. I have often heard people say that they are "scared" to prepare a networth statement, or a monthly income statement. I often tell these people (friends and co-workers) that, justlike getting your car "checked up", or just like you get an annual "check up" with the doctor, it is definitely important to get your financial check up. The key is just to act!
For many, simply adding their bank accounts, their investments, their home and investment properties and deducting all liabilities is as simple as logging into one or two bank accounts online, and throwing a few numbers on an Excel spreadsheet. Yet, why do people not actually do this? FEAR! They fear knowing that they are not financially secure, or that they have more debts than they can afford.
The fact of the matter is this: no matter whether you review your financial health or not, your financial condition is what it is. The real fear should be ignorance itself - you can only develop a plan when you know your starting point. Without a roadmap, you can't get to your destination. The same holds true with your financial health.
To conclude, make sure you check your financial health every quarter to see how you stand, and what you need to do to keep yourself on track. If you are more obsessive, maybe check monthly. A little work will go a long way to achieving your financial goals!
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