Merry Christmas! With more updates


A few updates in the run-up to Christmas:

  • Dividends & buybacks
    • Following issues with its latest Galaxy Note, Samsung decided to support its share price by boosting its dividends to 50% of its free cash flow. Samsung is also facing pressure from activist fund Elliott.
  • Unicorns & valuations
    • Stripe joined the unicorn club last month after being valued at $9bn despite raising less than 2% of this amount.
    • Unicorns in need to add liquidity to their shares but not meeting (yet) public market requirements have increasingly relied on secondary markets to trade shares, despite the lack of transparency associated with these semi-private markets. $1.2bn worth of transactions are expected to take place in 2016 at a time where tech company IPOs are expected to reach their lowest level since 2009 and investors are becoming increasingly cautious about overvalued sectors, including on-demand delivery.
    • Uber reported a $800m third-quarter loss although it states it is now cash-flow positive in some mature markets. Consolidated profitability seems far away still.
    • The mayor of Barcelona fined Uber and HomeAway €600k each last month for not complying with local licensing requirements. In France, Airbnb committed to send tax data to French authorities automatically rather than leaving it up to individuals to declare as it used to be the case. Registration will be made compulsory for landlords willing to let their property more than 120 days a year.
  • Cybersecurity
    • Yahoo revealed that 1bn users were stolen personal data in 2013 in an attack dwarfing the one reported in 2014. Compromised datasets may include names, email addresses, telephone numbers, birth dates as well as poorly encrypted passwords. This security issue may thus create vulnerabilities for other websites, as users tend to recycle the same password for multiple websites, according to Lisa Pollack from the Financial Times.
    • Hackers targeted the SWIFT messaging network with the help of Bangladesh central bank officials, highlighting the vulnerability of IT systems to insider fraud.
    • A couple of weeks ago France unveiled its cybersecurity policy. The country aims to build defensive capabilities as well as an offensive arsenal, which could include traditional weapons.
    • Several hedge funds investors warned big data sellers that they were failing to properly hide personal information. Cross-referencing information enables recipients to waive the anonymity of the data.
  • Active & passive investing, bonds & equity
    • The passive investing frenzy seized bond markets, which now ‘host’ more than $600bn of fixed income ETFs, threatening the stability of the financial system, according to experts. The bubble around fixed income is expected to weaken in the coming months given the Fed’s willingness to raise interest rates three times next year – subprime borrowers have already started to feel the heat.
  • Blackberry, LinkedIn, Twitter, Apple
    • Blackberry raised its full-year profit outlook as its software & services business generated more than 50% of its sales over the last quarter. Management expects to bring the company back to profitability on an adjusted basis in the full year.
    • Russian authorities blocked access to LinkedIn for its 6 million users in the country as Russian legislation requires personal data of Russian citizens to be stored on Russian territory.
    • LinkedIn added a robot tool to its chat interface in order to trigger more numerous conversations between individuals and ultimately gathering more data on its users.
    • For its part Twitter suffered another executive departure as its chief technology officer Adam Messinger resigned after 3 years in the job.
    • Apple is the latest investor to express interest in Softbank’s $100bn planned tech fund.

I unfortunately doubt that I will have the time to publish another post before the end of the week, so I wish all readers a Merry Christmas and I look forward to publishing again in the New Year at the latest.

On dividends and share buybacks

Note: Today’s post is solely based on French references. For once.

As some of you may know by now, corporate finance is one of my ‘little weaknesses’ and I am always fond of press articles illustrating – with very variable success – simple corporate finance theories. Last Friday the French newspaper Les Echos involuntarily published two great articles on the use and impact of dividends and share buy-backs.

In a nutshell, the first article voiced the disappointment of TF1’s shareholders – TF1 is the largest private TV media group in France – as the dividend in 2015 was lower than in 2014 and the share buyback program of €30m was less sizeable than expected. One expert quoted in the article stated that “one could have expected more cash return to shareholders after the Eurosport disposal”.


And yet this is a common fallacy in which many shareholders fall. Higher dividends can be seen at best as neutral, but more often than not they are send a negative signal to the investor community. Why? Dividends are by definition money paid by the company to its shareholders. It is simply a transfer of wealth, not a value-creating mechanism, and as a consequence any dividend payment is reflected in the share price ‘at cost’ – i.e. if a share is worth $100 pre-dividend and it pays a dividend of $5, the post-dividend share price is $95. Therefore, any shareholder can decide himself of the dividend he would like to receive, by selling (if the dividend is perceived as too low) or buying (if the dividend is perceived as too high) an appropriate number of shares. Worse, a ‘forced’ dividend payment implicitly assumes that the company cannot do anything better with the money than giving it back to its shareholders. This is a gloomy conclusion, if we consider the fact that many Treasury Bills pay a negative interest rate and stock markets stumble around.

And this is why the second article offers a more balanced view on the benefits of share buybacks. In one hand, several experts interpret this as a positive sign if the company is able to maintain its margins in the future and benefits from a strong cash position. On the other hand, many others perceive this as “waste” and missed opportunities in a low interest rate environment. France is by no means isolated, as the chart below shows.

Quarterly Share Repurchases ($M) and Number of Companies Repurchasing Shares. Source: FactSet.
Quarterly Share Repurchases ($M) and Number of Companies Repurchasing Shares.
Source: FactSet.

To conclude, the fact that share buybacks are making a comeback is worrying sign for the state of the global economy. Companies are struggling to spot even barely profitable investments while shareholders are ready to claim their money with limited investment alternatives available. At a global level, all the money leaving the economic circuit is ultimately harming the recovery – through what economists call the multiplier effect, more on that in another post. This is no more, no less the vicious circle Joseph Stiglitz was also condemning in his latest Les Echos column. Shareholders must be careful about what they ask.

Updated: As I was finalising this article, I came across this article from today’s Financial Times which not only provides further quantitative evidence to the rise of dividends in 2015 but also jeopardises my promise to only quote French articles…