Western Railroad Discussion > UP Buybacks Musings….

Last week the WSJ reported that UP has a $25 billion plan for buybacks: it implied it would be over the next 12 months, which seems like a surprisingly high nunber. Would that be possible to do that large of a buyback over 1 year?
 
Buybacks have been discussed on TO often, mostly with criticism and an occasional support. $25 billion could do a lot to expand capacity, modernize and streamline UP 19th-Century ROW’s in key areas, etc. Of course, all this is predicated on that UP would want to grow its traffic. Clearly, such capex actions have risks that management in today’s Wall Street driven “next quarter” focus is loathe to undertake. 
 
So, taking a wild step into Fantasyland (with apologies to Walt Disney), if UP really did have the vision and management team (I know, they don’t, but pretend…) that could pursue the levels of traffic expansion that everyone except the railroads seem to believe exists, what would be the comparisons between the benefits of these buybacks vs. making the capital investments? How would each affect stockholder value?
 
$25 billion would pretty much allow UP to modernize all of those archaic ROWs on virtually every major mountain pass and/or canyon (you could get 2MT or much longer sidings wherever operationally it made sense, minimize a lot of curvature, get new tunnels). You could build new intermodal ramps in those major urban areas where needed, including substantial land purchases. And you could eliminate most major bottlenecks system-wide, including both urban entanglements like Houston and yards (like more than just a band-aid renovation of Englewood). Not being a money-pit fiasco like CHSRA, you would be able to do so at far lower costs to build a true “21st Century Freight Railroad”. Would it make sense – not in the risk-averse world, but in a “build-for-the-future” world (that we all know does not exist).
 
How do the two paths compare?
 
Bruce
 
 
 

Well, if the UP doesn't undertake at least some capacity improvements there's no way they can effectively handle the new business from Swift, Hyundai, APL Logistics, and Schneider National on top of existing stuff.  The marketing department is doing a great job leveraging PSR to get new business, but the operating dept is seemingly getting nothing but a few siding extensions to run the actual traffic.    

Open up shops and fix locomotives so road failures aren’t killing the railroad. Quit pulling up switches at every house track and industrial spur so traffic could be generated and B/O cars don’t have to be drug MILES to set out. Screw the whole gotta spend billions, millions would go a long way.

The stock buybacks are the signs of a ship that’s starting to seriously list. Watch for the captain and officers to start eyeing lifeboats

Posted from iPhone

Drknow Wrote:
-------------------------------------------------------
> The stock buybacks are the signs of a ship that’s starting to seriously list. Watch for the captain and officers to start eyeing lifeboats

I couldn't agree more.  Artificially propping up stock price by share buybacks says you're all out of ideas of how to use that money to grow or improve the business instead.  And at $25B, that's a lot of trying new markets and new ideas, or even just reinvesting in a system that's been cut to the bone.

I took a look at the 12/31/21 UP 10-K.

12/31/21 cash and cash equivalents was $960 million.  2021 net income was $6.5 billion.  Total debt was $29.7 billion.  $7.3 billion in stock was boughtt back in 2021.  UP 2022 expected capital expenditures are $3.3 billion.

$25 billion 12 month stock buy back does not seem feasible based on the above numbers, unless UP issues a HUGE amount of long term debt.

UP, like most companies, lets Wall Street dictate operations.  Analysts and large investors look at quarterly results rather than long term.  Money spent on capital improvements (and much of which wil end up in the hands of consumers) will have a bigger multiplier effect in the economy than stock buy backs.

The feds should (but won't) do something (negative tax implications?) to control the use of debt for stock buy backs or dividends.  Too much potential damage to companies.

Steve

Speaking of investing in capacity, I seem to remember that the Sunset Route double tracking project stalled some time ago?

SGillings Wrote:
-------------------------------------------------------
> The feds should (but won't) do something (negative
> tax implications?) to control the use of debt for
> stock buy backs or dividends.  Too much potential
> damage to companies.

Great post and that's really the heart of the problem, they get away with whatever they can. Spending much more on buybacks than you have in free cash flow and using debt (going on for years) for it is a quick ticket for a future doomsday. First, there was nearly $50 billion in UNP buybacks from 2007 through the end of 2021, and now add $25 billion more for a total of nearly $75 billion in 15 years, much of which is financed with debt because interest rates are low but ballooning the debt as seen in the 10-k numbers. That is surely a recipe for disaster, the players causing it will have moved on for somebody else to clean up. When are they ever really gonna pay back $30-40 billion or more in debt? What could $75 billion, or even a part of it, pay for in a more beneficial way for the long-term viability of the company? At least clean up the ROW around LA, lol...

BTW, Goldman is predicting a trillion dollars in corporate buybacks this year alone, perhaps and all-time high. Somebody please tell me there isn't something wrong with a system that allows this much imbalance for the benefit of a small few when the world seems to be falling apart? Forget the politics, logically this is unsustainable...

JG



Edited 4 time(s). Last edit at 03/21/22 11:19 by jgilmore.

SGillings Wrote:
-------------------------------------------------------

> The feds should (but won't) do something (negative
> tax implications?) to control the use of debt for
> stock buy backs or dividends.  Too much potential
> damage to companies.
>

A crash NTSB won't be dealing with.

TAW

The Board has allowed management to buy back shares when the situation is appropriate. Which used to mean when the stock was underpriced, or needed support. Union Pacific did buy back about seven billion dollars in shares last year.  The Board has authorized re-purchase of another hundred million shares (about $12 billion) over the next three years.

Since companies distribute millions of shares to management and key employees via stock options, systematic re-purchase on the open market keeps the total number of shares in a rough balance over time.  Reasonable people do differ on whether the stock needs support, and whether management is getting too many shares.  There are good arguments about whether dividends or buybacks are better ways of returning gains to the company's true owners.

https://www.yahoo.com/video/union-pacific-unp-17-6-222910699.html

Buying back shares or issuing dividends to make hedge fund managers such as Bill Ackman happy are not, in my humble opinion, "appropriate" situations.  Issuing debt to do such is not "appropriate" in my opinion.  As I stated above, UP had $29.7 billion in debt at 12/31/21.  Any "excess" cash after capital expenditures should go to paying down that debt.  If there is any "excess" cash after net income less capital expenditures, debt pay downs, etc., then issuing dividends is fine and how companies should operate (unless a relatively new company needs funds for R&D).  UP had over $1.1 billion in interest expense for 2021.  That is a HUGE amount, especially compared to $9.3 billion operating income.  Companies need to stand up to the Bill Ackman's of the financial world.  Some raiders have forced companies to take on additional debt for dividends or stock buy backs and then sold their shares, leaving the companies no better off regarding cash and indebtedness than can cripple the company going forward.

I also don't think that a company needs to keep shares in a rough balance over time.  In regards to stock options, convertible debt, or convertible preferred shares, investors see that effect in weighted average shares diluted in the statement of operations and such is also disclosed in a footnote to the financials.  Future options for employees are probably factored in by savvy investors and probably aren't very material in relation to total number of shares outstanding..  UP had 653.8 million weighted average number of shares basic for 2021 and 655.4 weighted average number of shares diluted for 2021, a difference of only 1.6 million shares, or 0.24%.  Basic earnings per share were $9.98 and diluted earnings per share were $9.95, a $0.03 difference.

Steve

The Board, and the share owners, decide the appropriate mix of debt and equity.

If the share owners want to throw out the rascals, they have all the votes.

Posted from Android

When was the last tme a Board listened to stockholders without voting rights?

Out

Board members determine the mix of debt and equity, but that is not always appropriate for the long term viability of the company.  Some board members are in fear of the Bill Ackman's of the world and vote for what they think will allow them to continue as board members.

Steve

Lackawanna484 Wrote:
----------------------------------------------
> If the share owners want to throw out the rascals,
> they have all the votes.

That sounds like a company/investor line. What shareholders are gonna throw out the people running the free ATM?

That's a useless thought and why outside intervention is needed...

JG

I remember the Board of Directors over my former employer, they didn't have a clue as to what we did
and how they were selected was at best dubious.

Out 

My experience has only been with small companies.  In those, the chairman (also the CEO) chose those to be nominated; sometimes just yes men to the CEO.  Who you know is often important. I would expect a company the size of UP would be more professional in choosing members, but....

Steve

Sunset route expansion stopped several years ago with 80-85% of the route being 2 main track between El Paso and Colten. Honestly doubt that last 15-20% is completed anytime soon unless traffic count starts approaching 80+ trains.

CPR_4000 Wrote:
-------------------------------------------------------
> Speaking of investing in capacity, I seem to
> remember that the Sunset Route double tracking
> project stalled some time ago?

Right. The old authorization to buy back shares ends on March 31. So they need a new one.

I've maintained for years that if employees don't own a meaningful amount of stock and have seats on the Board, management will ignore them.

But, CSX was stampeded by Mantle Ridge, which owned under 2% of shares. Employees own nothing, for all practical purposes.

Posted from Android

Based on today's price of approximately $265, that would be up to $26.5 billion spent over 3 years.  That is an average of nearly $9.0 bilion per year, which, based on the 2021 cash flow, would be difficult to do without some debt issuance.  I would sure like to know the thinking of the board.  Is the buy back just to increase value to shareholders, or is it to increase the security of the board seats?

Steve

Probably yes to both.

Don't forget that when a buyback is done, a lot of mouths get fed. Bankers, !awyers, and other related groups.

Maintaining a balance between shares outstanding and earnings drives the EPS calculation. So, you don't want total shares to go too far ahead of total earnings.

Posted from Android