Monday, February 9, 2009

Why is the stock price the way to make business decisions?

from Printing Industry News, Commentary & Analysis, Research and Consulting at WhatTheyThink:

"By: Gail Nickel-Kailing February 9th, 2009 --
The last two years have been a series of ups and downs for Cenveo – mostly downs. 2007 started off with the company’s shares well over $20 each, heading into $25 plus. Even as late as August 2008, more than 18 months later, when the stock price was $9.56, CEO Robert Burton Sr. was still saying he was looking for a stock price of $30
. . . As economic conditions continued to worsen, companies across all industries had to take steps to keep revenues stable, cut costs, and bolster share prices. The last week of September, insider stock purchases were fast and furious.
Further on, Gail quotes Dr Joe Webb,
In November 2007, he wrote “stock buybacks are disappointing, or worse…

One of the topics that has drawn negative comments in my direction are my concerns about stock buybacks and how they are not in the best interests of shareholders in the long run. This form of price manipulation increases the earnings per share of companies, giving the illusion of improved financial performance to those who might not have the wisdom or ability to dig deeper into the history of the numbers of shares offered.

It also implies that the company has exhausted its compelling ideas about where to better invest excess cash. If there is so much cash, giving it to shareholders in the form of a special dividend is clear and less open to the fluctuations of the marketplace. In most cases, holding onto the cash for potential acquisitions, future investments in research and development in areas not yet apparent, or to withstand market downturns might be a much better use of funds. Or here's a new idea: increase the regular divided, or establish one, which will inspire long-term investor confidence and better support the stock.

It may placate Wall Street "analysts." But we've seen that most of them are too busy to get it right anyway. Why do we keep trying?

How about if executive comp were tied to dividends instead of stock price? It might get all our incentives aligned.

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