What 21st Century Theft Looks like: Texas Instruments ‘Stock Buyback’

It was a bit of a snooze fest in markets overnight. The punters are waiting on the Fed to tell them what to do next.

How sad that it has come to this. Capitalism my arse.

This is state-sanctioned capitalism. And when I say ‘state’, I don’t just mean the government. I mean the unelected bureaucrats, the bankers and the corporate interests that state-sanctioned capitalism serves.

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They’re all in on the game.

The Fed is at the top. Money/liquidity/credit/debt — call it what you will. As long as it flows, the game continues. And as long as us plebs play along, happy to pick up scraps where we can, nothing will change.

I could write for a week giving you examples of how this works. But thanks to me getting back on Twitter (follow me @gcanavan2), I came across a great article yesterday that makes the point superbly.

Written by Ben Hunt at Epsilon Theory, the article shows how the age of financialisation is all about enriching the managerial class. The intro says it all…

It’s a note about financialization…the zombiefication of our economy and the oligarchification of our society.

Financialization is profit margin growth without labor productivity growth.

Financialization is the zero-sum game aspect of capitalism, where profit margin growth is both pulled forward from future real growth and pulled away from current economic risk-taking.

Financialization is the smiley-face perversion of Smith’s invisible hand and Schumpeter’s creative destruction. It is a profoundly repressive political equilibrium that masks itself in the common knowledge of “Yay, capitalism!”.

What does Wall Street get out of financialization? A valuation story to sell.

What does management get out of financialization? Stock-based compensation.

What does the Fed get out of financialization? A (very) grateful Wall Street.

What does the White House get out of financialization? Re-election.

Texas Instruments Enriching the Managerial Class

Hunt then goes on to tell the story of US semiconductor company Texas Instruments Inc [NASDAQ:TXN] and their stock buyback program.

Stock buybacks occur when a company has excess cash. Instead of investing in plant and equipment or hiring new workers (or increasing dividends), management decide to buy back their own shares.

The idea is that investing in your own company is a better use of shareholder funds. As the company buys back shares, it cancels them. The investment should therefore boost financial metrics like earnings per share.

Companies do this all the time. But it is especially prevalent in the US. Mostly, they buy back shares at the top of the cycle and sell them (to raise capital) at the bottom.

Anyway, what got Hunt investigating TXN further was a tweet that said something like: Since 2006, TXN revenue up 2.6%, share price up 300%. Investors fooled by buybacks.

So Hunt did some analysis. He estimated that from 2014–2018, TXN generated around US$25 billion in free cash flow.

Free cash flow is an estimate of the cash generated by a business that is ‘free’ to reinvest in growth, pay out as dividends or buy back stock with. It’s the cash over and above what a business needs to maintain current operations.

Of that amount, US$9.1 billion went to shareholders in the form of a dividend. US$15.4 billion went to stock buybacks. Virtually none went back into the business for growth. And this is a tech stock!

Anyway, you’d expect there to be a decent reduction of shares on issue thanks to such a large buyback, right?

Unfortunately not. Shares on issue only declined by 10%.

Why?

Because management were busy giving themselves shares and options packages while buying them back.

As Hunt explains…

Remember all that stock and all those warrants sold to management with one hand while the other hand buys it back? Remember all that stock-based compensation?

We can measure the windfall compensation paid to TXN management here.

From 2014 through 2018, Texas Instruments bought back 228.6 million shares for $15.4 billion. That works out to an average purchase price of $67.37.

Over that same time span, Texas Instruments sold 90.8 million shares to management and board members as they exercised options and restricted stock grants, for a total of $2.5 billion. That works out to an average sale price of $27.51.

The difference in average purchase price and average sale price, multiplied by the number of shares so affected, is the direct monetary benefit for management. This is true whether or not management sells their new shares into the buyback or holds them. That amount works out to be $3.6 billion.

In other words, 40% of TXN’s stock buybacks over this five year period were used to sterilize stock issuance to senior management and the board of directors.

In other words, senior management and the board of directors received $3.6 BILLION in direct value from these stock buybacks.

I guess there’s nothing more to say, really…welcome to the biggest and most sophisticated sting operation the world has ever seen.

Regards,


Signature
Greg Canavan,
Editor, The Rum Rebellion


PS:
I recently caught up with US gold expert Jim Rickards to talk about the truth behind the recent rise of the gold price in Australia. Click here to watch.


Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own. Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts. At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates. Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.


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