A Spirited Dirty Dozen ...

[ParentsOf4]

Interesting and simple explanation, but I'm not very knowledgeable and don't understand: If they buy their own shares, doesn't that money go back to TWDC and could be used to create upgrades, new attractions, increase wages, etc? And, that sounds like a perpetual motion machine...buy the shares, take the money used to purchase those shares and buy more shares, repeat....

Companies typically sell stock to get money (a.k.a. "generate equity"). When they repurchase (a.k.a. "buyback") stock, they are returning that money to the people who gave it to them (a.k.a. "returning equity to shareholders"). Let's examine this more closely using a simple example.

I have no money but have a great idea to make money. I convince you that my idea is great and you agree to give me $1000 in return for 2 shares of stock, each with a 'value' of $500. Remember, those shares really are nothing but paper. You gave me $1000 and I gave you a piece of paper. However, you're hoping I can do something with your money to create additional value. Still, at the moment you gave me the money, the 'value' of the company was $1000.

Through my business savvy, I succeed and the value of the company rises to $2000. Theoretically, your two shares are now worth $2000 (i.e. $1000 each).

Taking this one step further, you agree to sell one share back to me (as the company) for $1000. You now have your original $1000 back and the company is once again worth only $1000 because $1000 of the company's value was paid back to you. Your one remaining stock is worth $1000 while you received $1000 back from me (as the company).

So, when a company buys back stock, that money goes out the door and cannot be spent by the company since the company no longer has that money.

Think of the original transaction. You gave me $1000. You gave me 'something' for 'nothing'. When a company buys back its own stock, the exact opposite happens. The company is giving away 'something' for 'nothing'.

A stock buyback indicates that the people running the company don't have good ideas to "generate shareholder value". Effectively, when Iger buys back stock, he's saying, "I don't know how to spend the money Disney is making so I'm just going to return it to the investors and let them figure out how to spend it."

 

[The Empress Lilly]

Imagine what they could do with the 30+ billion spent in buybacks over the last 6 years( almost 8 billion scheduled for 2016). [...] Give everyone of the CMs a healthy raise and provide them free healthcare. I know I'm a darm socialist...

That's sold as socialism in America nowadays? Rewarding the people who actually earned all that wealth? Who turned their company into a success?

I thought the idea was that if you work hard in America and succeed you get paid for your success. And now that's dismissed that as socialism?

 

[Peter Pano]

A stock buyback indicates that the people running the company don't have good ideas to "generate shareholder value". Effectively, when Iger buys back stock, he's saying, "I don't know how to spend the money Disney is making so I'm just going to return it to the investors and let them figure out how to spend it."

You're of course right that a stock buyback means at first losing good money that can't be invested any more into the company directly. But sorry if I may seem naïve, but wouldn't it in effect also mean that the company is, with each buyback, more and more in control of itself and less dependent on other shareholders interests (which is usually plain profit). Also, they could keep more of their own future earnings to themselves and could invest that into their direct business instead of having to spread it by paying dividends to all shareholders? That wouldn't appear so evil after all.

 

[bcoachable]

Link to Motley Fools article on The lights going out on the parade...
Basicly a ripping of the decisions made lately by the mouse...
http://www.fool.com/investing/2016/08/13/disney-world-needs-a-new-charge.aspx

 

[SorcererMC]

Also, they could keep more of their own future earnings to themselves and could invest that into their direct business instead of having to spread it by paying dividends to all shareholders? That wouldn't appear so evil after all.

I don't see share repurchases/ stock buybacks as 'evil', but rather 'lazy'. It can artificially inflate the EPS thereby giving the illusion of growth without having to make any operational improvements (ie and they can meet their quarterly EPS targets). Dividends reflect the current payoff to investors, while stock buybacks reflect future payoffs. (An Investopedia article says that they have spent $21 Bln in stock repurchases 2010-15, b/c no, I'm not going back through the qtly financials. It also claims that this amount is more than what they are spending on annual stock dividends.)

So the question is - 'how are they investing in their business?' Disney's double-digit growth has largely been due to its mergers and acquisitions strategy - which counts as investing in its business in terms of expanding their IP for broader appeal; Iger says that this is generating shareholder value (and I think Wall St agrees). It focuses on short-term growth while their value for long-term growth remains to be seen - there is an opportunity cost of relying on M&A vs. investing in their existing assets, including P&R. No doubt they are trying to get these IPs into the parks any way they can! in order to monetize that 'future' value.

My point is that they could be making more improvements to P&R (eg WDW), but their investment money has been going elsewhere. They could be investing more in their CMs, but they're not. Why? My guess is that it's b/c Wall St hasn't been favoring those kinds of investments; TWDC is beholden to stock price and stock buybacks haven't changed that....a paradigm shift would need to take place.

 

[ParentsOf4]

You're of course right that a stock buyback means at first losing good money that can't be invested any more into the company directly. But sorry if I may seem naïve, but wouldn't it in effect also mean that the company is, with each buyback, more and more in control of itself and less dependent on other shareholders interests (which is usually plain profit).

Arguably, a company has less control over itself as it buys back its own stock. As the number of outstanding shares decreases, each remaining shareholder has proportionally more control. In other words, there are fewer shareholders with each remaining shareholder exercising more power over the company. (A stock that is repurchased is either retired or is carried on the books as a treasury stock. Either way, it has no voting rights.)

Think about the simple example I previously provided. I gave you 2 shares of stock for $1000. At that point, you own 100% of the company.

Then I (as "the company") bought back 1 share of stock. But "I" didn't actually buy it. "The company" bought it. But when the company bought it, the money behind that 1 share of stock went out the door. Once that money goes out the door, there is no money behind that stock, which is why that 1 share of repurchased stock has no voting rights.

In this case, you now have only 1 share of stock but you still retain 100% ownership of the company because you still own all of its stock.

In Disney's case, they have repurchased over 1.2 billion shares while Iger has been CEO, with about 1.7 billion shares remaining.

 

[Peter Pano]

Arguably, a company has less control over itself as it buys back its own stock. As the number of outstanding stares decreases, each remaining shareholder has proportionally more control. In other words, there are fewer shareholders with each remaining shareholder exercising more powe

I see. Thanks for these explanations. Gotta love a forum where you can actually learn a few things!
But, just for argument's sake, in the theoretical case of Iger/Disney/"the company" will be able to repurchase all the existing stocks left. Who then would actually "own" the company?

 

[Mike S]

I see. Thanks for these explanations. Gotta love a forum where you can actually learn a few things!
But, just for argument's sake, in the theoretical case of Iger/Disney/"the company" will be able to repurchase all the existing stocks left. Who then would actually "own" the company?

Me, because I would never sell my stock if it came to that

 

[Peter Pano]

Me, because I would never sell my stock if it came to that

Now that would be the solution. Disney in the hands of the die hard Disney fans, who wouldn't part from their stock even for a thousand dollars per share!

 

[ford91exploder]

I don't see share repurchases/ stock buybacks as 'evil', but rather 'lazy'. It can artificially inflate the EPS thereby giving the illusion of growth without having to make any operational improvements (ie and they can meet their quarterly EPS targets). Dividends reflect the current payoff to investors, while stock buybacks reflect future payoffs. (An Investopedia article says that they have spent $21 Bln in stock repurchases 2010-15, b/c no, I'm not going back through the qtly financials. It also claims that this amount is more than what they are spending on annual stock dividends.)

So the question is - 'how are they investing in their business?' Disney's double-digit growth has largely been due to its mergers and acquisitions strategy - which counts as investing in its business in terms of expanding their IP for broader appeal; Iger says that this is generating shareholder value (and I think Wall St agrees). It focuses on short-term growth while their value for long-term growth remains to be seen - there is an opportunity cost of relying on M&A vs. investing in their existing assets, including P&R. No doubt they are trying to get these IPs into the parks any way they can! in order to monetize that 'future' value.

My point is that they could be making more improvements to P&R (eg WDW), but their investment money has been going elsewhere. They could be investing more in their CMs, but they're not. Why? My guess is that it's b/c Wall St hasn't been favoring those kinds of investments; TWDC is beholden to stock price and stock buybacks haven't changed that....a paradigm shift would need to take place.

Agreed in most cases share buybacks are NOT evil especially if they are small in scale compared to revenue as another poster has noted there is a ETF which tracks the the 100 top share repurchasers as a percentage of revenue and Surprise, Surprise those companies by measures OTHER than EPS are dramatically underperforming the market, https://www.spdrs.com/product/fund.seam?ticker=SPYB

When share buybacks are done at the top of the market they are showing that management has NO CLUE in how to actually INVEST in the business. What's worse is this behavior ALSO tends to inflate the same clueless management's compensation so they increase their compensation for doing NOTHING AT ALL.

For some information on why these funds are bad buys -

http://www.marketwatch.com/story/st...tments-you-can-buy-with-confidence-2015-03-12

 

[ford91exploder]

I see. Thanks for these explanations. Gotta love a forum where you can actually learn a few things!
But, just for argument's sake, in the theoretical case of Iger/Disney/"the company" will be able to repurchase all the existing stocks left. Who then would actually "own" the company?

The current management team of TWDC when the last share is repurchased would be the 'owners' of the company in that case.

 

[SorcererMC]

Agreed in most cases share buybacks are NOT evil especially if they are small in scale compared to revenue as another poster has noted there is a ETF which tracks the the 100 top share repurchasers as a percentage of revenue and Surprise, Surprise those companies by measures OTHER than EPS are dramatically underperforming the market, https://www.spdrs.com/product/fund.seam?ticker=SPYB

When share buybacks are done at the top of the market they are showing that management has NO CLUE in how to actually INVEST in the business. What's worse is this behavior ALSO tends to inflate the same clueless management's compensation so they increase their compensation for doing NOTHING AT ALL.

For some information on why these funds are bad buys -

http://www.marketwatch.com/story/st...tments-you-can-buy-with-confidence-2015-03-12

Yes, one of the articles I read mentioned the SPYB and confirms what you say re: underperformance.

Regardless of what one thinks of Iger's creative and strategic vision (or lack thereof), he does seem to be a master at the game IMO. Though I can't help but wonder how much of DIS stock price is based on a positive feedback loop, ie, is it an inflated bubble subject to deflate upon Iger's departure/ successor announcement? Wall St seemed kind of 'meh' on the BamTech acquisition.

That MarketWatch article also has a nice WSJ video on how happy workers positively impact stock price and companies with good morale tend to outperform on the S&P500....(as if more evidence was needed to show that CMs could use a boost).

 

[brb1006]

Retired 'Imagineer' A Disneyland Pioneer: Rolly Crump helped design Tiki Room, Small World and Haunted Mansion attractions

http://www.sandiegouniontribune.com/news/2016/aug/10/disney-imagineer-rolly-crump-profile/

(He doesn't have kind words to say about Walt Disney World though)

 

[ford91exploder]

Yes, one of the articles I read mentioned the SPYB and confirms what you say re: underperformance.

Regardless of what one thinks of Iger's creative and strategic vision (or lack thereof), he does seem to be a master at the game IMO. Though I can't help but wonder how much of DIS stock price is based on a positive feedback loop, ie, is it an inflated bubble subject to deflate upon Iger's departure/ successor announcement? Wall St seemed kind of 'meh' on the BamTech acquisition.

That MarketWatch article also has a nice WSJ video on how happy workers positively impact stock price and companies with good morale tend to outperform on the S&P500....(as if more evidence was needed to show that CMs could use a boost).

Disney in my opinion is a weird combination of a momentum + bubble stock at the moment, Iger has been able to control the message for so long that analysts are simply seeing the ever increasing EPS and ignoring everything else, If $DIS sees two bad quarters the stock is going to go off the cliff and fast.

The 'Street was 'meh about BamTech because the 'Street is well aware of the capital requirements of streaming properties and is skeptical about Disney's desire to adequately FUND BamTech with their current IT spend patterns. BamTech is going to need BILLIONS in CAPEX and OPEX to expand to meet the demands of the customers. If BamTech is unable to fufill those needs Akamai and others will be more than happy to fill the gap.

 

[SorcererMC]

Disney in my opinion is a weird combination of a momentum + bubble stock at the moment, Iger has been able to control the message for so long that analysts are simply seeing the ever increasing EPS and ignoring everything else, If $DIS sees two bad quarters the stock is going to go off the cliff and fast.

The 'Street was 'meh about BamTech because the 'Street is well aware of the capital requirements of streaming properties and is skeptical about Disney's desire to adequately FUND BamTech with their current IT spend patterns. BamTech is going to need BILLIONS in CAPEX and OPEX to expand to meet the demands of the customers. If BamTech is unable to fufill those needs Akamai and others will be more than happy to fill the gap.

Since I don't know much about BamTech and its tech requirements, I'll just say that it was very interesting watching the CNBC interview with Iger after the earnings report was released, and watching DIS tick down in after hours trading as Iger kept saying that TWDC is 'neutral' on the streaming market changes. Almost every analyst had a question about the 33% stake purchase on the earnings call. I thought it was slightly unusual - considering that they met earnings expectations, and Wall St is 'punishing' companies that aren't meeting those right now. (DIS only increased slightly the next day; giving Iger the 'benefit of the doubt' may be waning).

 

[SorcererMC]

Retired 'Imagineer' A Disneyland Pioneer: Rolly Crump helped design Tiki Room, Small World and Haunted Mansion attractions

http://www.sandiegouniontribune.com/news/2016/aug/10/disney-imagineer-rolly-crump-profile/

(He doesn't have kind words to say about Walt Disney World though)

That was a good read! Thanks for posting it.

 

[bcoachable]

Loved the read on Rolly as well!
There is an Imagineering book/biography featuring Rolly that is fantastic. I remember it being titled "It's Kind of a Cute Story". Very good read. My favorite story (as I remembered it) was when Rolly rode his motorcycle through the halls of WED,,, and the look he got from Walt... that must have been priceless!
I would love to know where we could view the documentary mentioned in the article.

 

[englanddg]

Loved the read on Rolly as well!
There is an Imagineering book/biography featuring Rolly that is fantastic. I remember it being titled "It's Kind of a Cute Story". Very good read. My favorite story (as I remembered it) was when Rolly rode his motorcycle through the halls of WED,,, and the look he got from Walt... that must have been priceless!
I would love to know where we could view the documentary mentioned in the article.

That auto-biography of Rolly was written by one of the hosts of Communicore Weekly.

 

[ford91exploder]

Since I don't know much about BamTech and its tech requirements, I'll just say that it was very interesting watching the CNBC interview with Iger after the earnings report was released, and watching DIS tick down in after hours trading as Iger kept saying that TWDC is 'neutral' on the streaming market changes. Almost every analyst had a question about the 33% stake purchase on the earnings call. I thought it was slightly unusual - considering that they met earnings expectations, and Wall St is 'punishing' companies that aren't meeting those right now. (DIS only increased slightly the next day; giving Iger the 'benefit of the doubt' may be waning).

The key to streaming is that it has very high IT infrastructure costs using the largest routers built by CSCO, JNPR and the biggest storage systems from NTAP and HPE and the gear needs to be upgraded/replaced every 2-3 years so you don't get the tax advantages of depreciation over 5-7 years, The question at hand is DIS willing to fund this type of huge ongoing expense which is simply a cost of doing business. For a comparable look at AKAM they are much larger but scale does not affect base hardware/operations expense

 

[englanddg]

The key to streaming is that it has very high IT infrastructure costs using the largest routers built by CSCO, JNPR and the biggest storage systems from NTAP and HPE and the gear needs to be upgraded/replaced every 2-3 years so you don't get the tax advantages of depreciation over 5-7 years, The question at hand is DIS willing to fund this type of huge ongoing expense which is simply a cost of doing business. For a comparable look at AKAM they are much larger but scale does not affect base hardware/operations expense

It's the CDN that makes it expensive...but, many use third parties, like Akamai (which you mentioned)...