Christmas has come early for the Macquarie Infrastructure Group (ASX: MIG), but then it would when you decide to give $500 million… to yourself! We’re still puzzling out the exact transaction, but from what we can gather, MIG decided to sell some its U.S. toll road assets to another fund, Macquarie Infrastructure Partners for $1.06 billion. MIG then revealed that it, “will be applying up to A$500 million from the sale to an expanded on-market share buy back… .This will result in a total buyback of up to A$1 billion, of which approximately $272 million has been used to acquire securities since the buyback commenced on 3 October 2006.”
Who knows… maybe MIG’s own shares are a much better long-term investment than American toll roads. But isn’t a bit unseemly when the best place for your own cash… is yourself? Has an investment bank become narcissistic when its analysts conclude that the bank itself is the best investment on the market? Vanity, vanity… all is vanity.
But then, buying your own shares does tend to plump up your cheeks and give them a nice rosy hue. And it’s not like MIG is the only one doing it. According to Hirschel Abelson, the CIO of New York-based money management firm Stratlem, “in the twelve months ending March 31, 2006, US companies spent a record US$36 billion in stock buybacks.”
Abelson says that is, “an extraordinary amount NOT to put to work on behalf of the economy. Dr. Marc Faber enlightens us on the strategy, “Rather than investing in new facilities, corporations choose to distribute their cash to shareholders by buying back the company’s own shares, which reduces the number of outstanding shares and boosts earnings per share (ed: doesn’t this make the stock even attractive to the company’s buyers, prompting to buy even more of themselves?)
Is there real harm in using shareholder cash to boost earnings by reducing shares outstanding? Not visibly. And after all, here in Australia there is plenty of real business investment in real economic activity (building roads, digging mines, drilling for oil and gas etc.). But Abelson points out that when a company chooses to invest in itself-especially a company who makes a living investing in other assets-it probably means there aren’t a whole lot of other assets out there worth buying.
He writes, “There is nothing wrong with returning money to shareholders, but it is the thought process behind these decisions which raises red flags. Buybacks are typically an indication that there are no investments on the horizon that represent a superior use of the company’s money. Another downside to buybacks is that they give a false impression of corporate performance. Higher earnings per share are generally thought to result from real improvements, like higher sales.”
Real improvements. We like the sound of that. It reminds us of real assets. Abelson winds up, getting to the heart of the matter, and the real motive, “Buybacks can enhance the stock price-and thus mollify unhappy investors-without increasing overall revenues. So, on the one hand, buybacks are a sign that good investments may be lacking. On the other, they give investors the impression that the good times are rolling on.”
The times have never been better for the money shufflers. But they are having to get more creative to come up with new assets to securitize and re-sell to a gullible public. Even good con men run out of ideas every once in a while.
The flood of cheap money has flattened the total return on all asset classes… and forced Macquarie’s various spawns to use cash to reduce their float to improve earnings on a per share basis. If that doesn’t sound to you like real economic activity it’s because it’s not. Building bridges, pipelines, taking salt out of water, coal out of the ground, and gas from beneath the sea… that’s real economic activity.
Investors are going to realize that sooner or later. And then the precious metals are going to go to the moon.