This post is part of a series, where I compare Benjamin Grahams insightful analyis of the great depression on corporate America, with the effects of the "lost two decades" on corporate Japan.
".... present disparity between the cash asset position of many companies and the price of their stocks was ascribed ... to the huge issues of additional shares which transferred money from stockholders' pockets into corporate treasuries." (not the case for Japan; many leading stocks have been buying back stocks since late 1990`s, after share buy-backs were allowed by japanese authorities)
"... other enormous sums have also been accumulated in the form of undistributed earnings ... no wonder that corporate treasuries are still bulging, despite all the money that has been spent, or lost, or paid in dividend." (in many instances this holds true for Japan too, but one has to discriminate between individual companies; compared to europe, pay-out ratio in Japan still subdued; pay-out slightly better than in US)
"...grotesque result ... people who own these rich American businesses are themselves poor..."
(saw a documentary on Japan's homeless people, where one claimed he was a stockholder in corporate Japan. Than, I thought he was kidding, now I am not so sure anymore)
"...can't borrow from the bank ... on the basis of the cash behind his shares ... If he should appeal to the officers of the company ... probably wave him away ... or ... be charitable enough to buy his stock back at the current market price -- which means a small fraction of its fair value"
(asked my bank and they are not willing to lend against my japanese portfolio more than 10%)
"... prodigal transfer of cash by the public to corporations .... has seriously demoralized our banking structure ... Loans on securities have been secondary in volume and drastically subordinated in their standing." (that's the main problem of Japan's banking sector at the moment; little non performing loans on their books; eager to lend; but good borrowers eager to borrower not to be found ==> japanese banks expanding overseas (mainly asia))
"... what have the corporations and the public done between them in recent years? They have paid off the cream of the country's commercial borrowings and substituted security loans ... banks have been forced to lend to their stockholders against pledges of their shares, or to purchase securities on their own account." (partially true for Japan; successful japanese corporations almost debt-free; but japanese banks not buying japanese stocks in large sums (rather contrary, as they've been unwinding cross- shareholdings); don't know if they're lending against japanese stockportfolios; they're expanding overseas)
"... best form of borrowing has been replaced by the worse."
(not sure if oversea expansion of japanese banks is bad; they're filling vacuum european- and US banks have created after the Lehman crisis)
"Thousands of stockholders ... find themselves ... in an absurd position. ... market value of their stocks may be ... only ten millions ....company have fifteen millions in treasury, but it could borrow large additional amounts against its many millions of other quick assets. If the owners ... really controlled such a company, they could draw out not only the fifteen millions in cash but another five million from bank loans and still have a business in sound condition ...."
"Let corporations return to their stockholders the surplus cash holdings not needed ...."
(I wouldn't mind :))
"The immediate result .... benefit the individual stockholder ..... The secondary result ... improve the price of the shares ... and the stock market generally. The third result ... improve the balance of our banking structure ..."
(I think people who are bashing Japan are seriously underestimating this wildcard japan has got in this respect)
"How should this return of cash be accomplished?"
"...let companies offer their stockholders the right to sell stock in a fixed proportion and at a stated price.... This price should be above current market but ... below the net quick assets per share and therefore far below the book value. From the corporation's point of view the result .....increase both in surplus and in the net current assets per share ..."
(personally I've never witnessed this kind of corporate action; I`ve got tender offers by the companies I hold, but they were barefaced; offering a price at or even below market price; really don't know what some corporate officers are smoking in Japan)
"Other companies have returned surplus cash ... in form of special distribution without cancellation of stock."
(not very common in Japan; I think it has serious tax implications in Japan, but not sure)
"A few companies .... have returned surplus cash capital to shareholders by reducing the par value of the stock" (personally I've never seen it)
"All these methods accomplish the same purpose ... differences ... largely technical...repurchase of shares pro rata ... more practical in most cases ... has certain bookkeeping advantages over a straight special dividend."
"A sizeable number of enterprises ... employing surplus funds to acquire stock by purchase in the open market ... also represents a transfer of corporate funds to stockholders.. undoubtedly helpful to the market price ... repurchase of shares at bargain price presumably benefits the surviving shareholders ... cororations using excess cash in this manner are acting more liberally than thos who hold on like grim death to every dollar in bank." (most common form in Japan; has always been published with my holding so far and most of the time companies keep you updated on the progress; when share buybacks in japan are announced, they are also implemented, almost always the full amount announced; can't say the same for the US and Europe (I reckon some are still waiting for the buyback announced ages ago)
"...procedure is open to objections of various kind...undisclosed market operations may afford opportunities for questionable profit by directors and insiders." (not applicable anymore in our times, fortunately improved disclosure requirements in our times
"The Bendix Aviation company recently passed its dividend and concurrently announced its intention of purchasing .. shares in the open market. Other companies ... followed the same policy, though generally without...revealing their plan ... such a procedure contains possibilities of grave injustice ... the directors first duty is ... to maintain a reasonable dividend."
(Unfortunately that does happen in Japan; never witnessed the entire passing of a dividend or dividend cut, but numerous times share buybacks followed by earning downgrades; beware!!!)
"... reason for accumulating the surplus ... continuance of diviends in bad years ... abscence of earnings is in itself no justification for stoping all payments to shareholders. To withhold the owners' money ... by suspending dividends, and then to use the same money to buy back their stock at the abnormally low price thus created, comes perilously close to sharp practice."
"... writer does not regard open-market purchases as the best method of returning corporate cash ... Retirement of stock pro rata involves no conflict of interest between those selling out and those staying in ... no opportunity for errors in judgement or unfair tactics on the part of the management." (would love to see Graham´s approach in Japan; It makes so much sense)
".... return of a good part of such surplus cash ... great benefit to their own position ... stock market sentiment and to the general banking situation."
(corporate Japan does this to quite a significant extent; but it seems it hasn't got the slightest influence on the overall market sentiment; neither on an individual basis (just look to NTT; they are buying back tons of shares and the stock doesn't move an inch upwards)
"Why is the stockholder poor today? Because he borrowed from the banks in 1929 to put more cash into the companies he owns ... Much of it is still held intact ...stockholder need the money more than his company."
"Has he done anything to get it back? No. He thinks his company is broke because stock prices say so. He has forgotten asset value. he has forgotten that his officers and directors are supposed to be his own representatives, working for his own best good. He has forgotten that he is a part-owner and manager of the company in which he owns stock."
http://www.forbes.com/forbes/1999/1227/6415405a.html
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