Wednesday, September 29, 2010

Dividend policy

Let's put some links together on the broad subject -- one of great relevance to all the themes of this blog -- of corporate dividend policy. How do companies decide how much cash their stockholders get on a regular basis?

Here's a pdf from Deutsche Bank on the theory and practice.

And here are a few words from scholars at UPenn.

One piece of the puzzle is the fact that individuals in the US are generally taxed more for dividends than for the capital gain on the sale of stock. The dividends are "ordinary income." So, shouldn't a rational investor want the company to keep reinvesting its cash, building up that strike price, and earning him that capital gain? Why does anyone even want a dividend?

On the other hand, a stock that doesn't pay dividends has a Madoff-like air to it. I'm holding on to it so I can sell it at a higher price to someone else, you say? Well, why would he want it? Because he expects to sell it to a yet greater fool further down the road? Somewhere, somebody has to receive a stream of income/cash in order to anchor those capital gains. That, at any rate is one common sensical take on the issue.

At any rate, once a company has a history, a track record as to the quantity of dividends it pays, there is a good deal of pressure to keep it up. The dividend level is "sticky." Why? Because any departure can be taken as a signal. A cut in dividends can be considered proof the company is in trouble and desperately needs to hold onto its cash. An increase in dividends can also be taken as a signal that the company is in trouble, specifically that it is making a desperate move to perfume that fact!

Consider that Lehman Brothers, the broker-dealer that famously declared bankruptcy in September 2008 and set off that autumnal crisis, had increased its own dividends by 13% earlier in the year. You may as well give that some consideration -- if you are the member of a board of directors that institutes such a cut, signalling theorists will consider it for you!

Finally, if you are an investor, you might want to consider a dividend reinvestment plan. Especially because it goes by such a neat acronym. Such a plan is known as a DRIP.

Tuesday, September 28, 2010

Europe's Hedge Funds

Deliberations among the nations of the European Union about a new level of regulations for hedge funds there have reached an impasse.

I wrote here 11 months ago that the draft directive circulating at that time was dead as written. There have been lots of developments since.

The U.K., where most of the Europe-headquartered funds actually are, has been working to water down the more draconian aspects of these proposals from within the EU system, and the U.S. has been exerting some pressure from without.

The Brits are worried that this will hurt London's status as one of the world's great financial hubs, while the U.S., and in particular Treasury Secretary Geithner, worries that the EU is going protectionist -- that it will put barriers in the path of any institutions and high net worth investors there who want to entrust their money to operations in New York.

Meanwhile, the French and the Germans are pulling in the other direction, to make the regulations tougher on the nasty hedge funds, whether of New York or London, than the drafts of the directive would have it.

There is an idea circulating in some quarters that hedge funds were at fault in the 2007-08 credit crunch. That is utter nonsense. Quite old-fashioned, supposedly conservative and stodgy, institutions like banks were the real trouble makers. The hedgers generally did a good job of keeping their head while bankers all around them were losing theirs.

At any rate: the news this week is that EU diplomats tried to push the process forward at a meeting Monday, the 27th, but they failed.

A big possible winner is Switzerland. A map will tell you that the Swiss are in Europe, but they don't act like it. They've stayed away from the EU, and if EU rules do become too onerous for HFs, we might see a lot of them developing a taste for Alpine air.

Monday, September 27, 2010

Buy Some Furniture, Give the Cat A Name

This is the chart for the performance of Tiffany's common stock over the last six months. As you can see, there was an early peak at $52, then a jagged decline to $36 by early July. It has since risen from that, to the neighborhood of $46, although there was another dramatic-looking dip at the end of August.

That dip may have come about largely because Trian Fund, the investment vehicle of Nelson Peltz, has been selling. Trian still owns a 5.43% stake, whichmakes it Tiffany's biggest stockholder.

Tiffany did better-than-expected in recent quarters. But even that hurts it in Shapira's estimation, because she thinks it did well on the basis of declining commodity prices, and its profit margins are not sustainable.

The relevant Goldman Sachs analyst has downgraded Tiffany from neutral to sell. That analyst is Adrianne Shapira by name. She says, "TIF trades at a 26% premium to an index of department stores, which is approaching one standard deviation above the 3-year average premium of 15%. We believe as [earnings estimate] beats moderate in the near term, peak valuations will be tough to sustain."

There is not especially good reason for me to be discussing Tiffany's right now, but it does give me a chance to quote the famous dialog from a certain classic Audrey Hepburn movie:

Holly: Poor old Cat. Poor slob. Poor slob without a name. The way I look at it, I don’t have the right to give him one. We don’t belong to each other; we just took up by the river one day. I don’t even want to own anything until I can find a place where me and things go together. I’m not sure where that is, but I know what it’s like. It’s like Tiffany’s

Fred: Tiffany’s? You mean the jewelry store?

Holly: That’s right. I’m crazy about Tiffany’s…Calms me down right away. The quietness and the proud look of it. Nothing very bad could ever happen to you at Tiffany’s. If I could find a real-life place that made me feel like Tiffany’s then…then I’d buy some furniture and give the cat a name.

Here's hoping that Tiffany's itself finds that place.

Sunday, September 26, 2010

Airgas/Air Products

As regular readers will recall, this blog has traced the sometimes stormy relationship between two competitors in the market for industrial gas supplies, both headquartered in Pennsylvania: Air Products (APD), of Allentown, [get out of my head, Billy Joel!] and Airgas (ARG), of Radnor.

APD bid for ARG back in February and signalled at that time a readiness to wage a proxy fight for control.

Airgas held its annual meeting recently -- September 15. So ... what happened?

Shareholders elected the three nominees for director promoted by APD. But that doesn't mean an acquisition will go through uncontested. The board is staggered, so APD would have to win another election to gain majority control. Even in announcing their election, Airgas cautioned them against over confidence in this regard.

"Although our new directors were originally nominated to stand for election to our Board by Air Products, like all Board members, they have fiduciary duties to all AIrgas stockholders. These duties do not allow them to act in Air Products' interests, or in affiliation with Air Products."

Meanwhile, shareholders also voted on three proposed bylaw amendments designed for the benefit of the would-be acquirer, and it isn't clear what the result was of these votes.

Wednesday, September 22, 2010

ISS Sides with Burkle in B&N Matter

Institutional Shareholder Services (ISS) a major proxy-advisory firm, has recommended that shareholders in Barnes & Noble vote for the dissident slate backed by Yucaipa Cos. in the ongoing proxy fight.

B&N holds its annual meeting a week from today. Each of the other three major proxy-advisory firms, Glass Lewis, PROXY Governance, and Egan-Jones, has come down on the management's side.

This is in accord with the developing pattern. The folks at ISS are more likely to back insurgents than their colleagues.

In this case, ISS says: "Barnes & Noble’s history of poor performance, analysts’ lack of confidence in management’s ability to achieve its targets, corporate governance concerns regarding the company’s employment relationships with Leonard and Stephen Riggio, concerns about the independence of the current board, and questions over the rationale for the 2009 acquisition of Barnes & Noble College Booksellers from Chairman Leonard Riggio."

The book selling business is in the midst of a major transformation, and B&N has tried to keep ahead of the curve, bring out its Nook to compete with Amazon's Kindle and the other eReaders on the market for example. B&N has been increasingly aggressive over the last year in using its bricks-and-mortar stores to push the eReader on shoppers. That sounds a bit odd: "Buy this, and you'll never have to come here again!" -- but such is the transition to a digital age. Or to whatever the heck we are all heading for.

But some are skeptical of whether they really are out in front. Goldman Sachs, in a late-August report, said: "Results fell short of our forecast and, more importantly, reduced visibility on objectives going forward, given two factors: (1) Additional disclosure revealed surprisingly low gross profit margins for the .com business, reflecting both sharp, structural margin cuts in the traditional (physical) .com realm, and poor underlying profitability of the digital business in aggregate (Nook + ebooks). (2) Soft superstore sales, as results missed guidance issued two thirds of the way through the July quarter."

Tuesday, September 21, 2010

Boyd and Interoil

Roddy Boyd, in his blog, The Financial Investigator, has a fascinating post on The Interoil Math. Interoil is an oil and gas producer that, Boyd says, "recently raised cash at exorbitant rates and appears to be internally valuing its assets way below what the market appears to think they are worth."

So, on such revelations, its stock price should be tanking, right?

Ummm ... no. The stock price rose sharply in the middle of the day Wednesday, September 15, and held level at close to $64 a share through Thursday and Friday, and resumed moving north on Monday.

"To be sure," Boyd continues, "the bull’s case is both elegant and obvious: If there is oil and natural gas is in Papua New Guinea, and in the volumes suggested on the company’s properties, shareholders are in for an instant windfall to the tune of several dozen points worth of price appreciation."

And if my car had a propeller, it would be The Spirit of St Louis.

Provable reserves as I noted last November are hard to come by.Separately: any company that found them in Papua New Guinea would still have to be willing and able to spend the money to exploit them. Yet Interoil is cash strapped -- sufficiently strapped to need to pay those card-card-like interest rates we mentioned above.

Interoil will naturally tempt short selling. Of course, if you do go down that road, you take enormous chances, even if your underlying case is strong. Such intriguing recent books as CONFIDENCE GAME, whatever else they do, make this clear. I don't recommend shorting -- indeed, I don't recommend anything at all. [Except this: for roughly 99% of investors who have an interest in the equity markets, the best course is a simple passively managed fund, tracking some broad-based index.] Still, Interoil is the sort of spectacle that makes one wish there was more shorting activity in the financial world than there is. The number of nest eggs that have to be sacrificed to prove the prophetic powers of P.T. Barnum is unnecessarily high.

Monday, September 20, 2010

The CFTC on CPOs

The Commodity Futures Trading Commission (CFTC) has asked for public comment on a rulemaking petition from the National Futures Association (NFA), which would narrow the scope of the regulatory exclusion for registered investment companies from commodity pool operators (CPO) status.

Registered investment companies are at present eligible for a broad exemption from CPO status. 17 C.F.R. 4.5, but the petition would require that RICs seeking such an exemption represent that their funds will use commodity futures and commodity options contracts only for bona fide hedging purposes and that the fund will not be marketed to the public as a commodity pool.

The petition contemplates the application of these limits even retrospectively, to companies that previously had filed notices under the broader exemption, though it recommends that these companies be given time to come into compliance.

October 18 (my 52d birthday) is the deadline for comments.

Sunday, September 19, 2010

Inflation and the 1970s

In a lazy-Sunday mood, my mind is wandering back to the 1970s, assisted in its wandering by a recent book, RIGHT STAR RISING, by Laura Kalman.

Kalman's book covers the period 1974 to 1980, a period that began with the resignation of Richard Nixon and ends with the election of Ronald Reagan. How did we get from one to another? One might reasonably have suspected, a priori, that Nixon's fdall would signal a leftward move in the country's politics. Why did that not happen? That is the question that fascinates Kalman.

What I have read of her book has forcefully reminded me of the centrality of inflation in the politics of that period: inflation at levels we have not known since, and inflation that came to be taken for granted year-to-year. Ford declared that we could stop it, and introduced ridiculous WIN buttons. The inflationary environment stimulated more serious policy disputes, such as that over common situs picketing.

So let's think about inflation today. With all the "quantitative easing" and stimulus packages of the last couple of years, shouldn't we have expected some of late? Why has it remained so tame in 2010? Here's a take from The Motley Fool back in March.

One reason it has remained tame is simply that other currencies have taken harder hits than the dollar, and this has allowed the dollar to retain its significance as a safe haven. Switzerland, and its franc, has long been considered another safe haven, but its status as such took some hits in 2009, because the Swiss economy is so closely tied to world banking, and banking as an industry was so much under siege. For investors even nervous about Switzerland, the US dollar looked even better. (Sort of like the way the girls [boys, if you prefer!] all look cuter at closing time?)

Of course the safe-haven notion increased demand for the dollar, and the increased demand has kept its value up, i.e. has foiled the forces that would otherwise have pressed for inflation/devaluation.

But I think we've gotten as much mileage out of that as we're going to get, and we may be headed back to the '70s sans DeLorean.

Wednesday, September 15, 2010

Three Brief Items

1. Genzyme Refocus

The Wall Street Journal yesterday told us that Genzyme is selling one of its non-core units, its genetic-testing business, as part of its effort to "fend off" the takeover efforts of Sanofi-Aventis SA.

Genzyme is apparently trying to rid itself of two other units also, a diagnostics concern (that sells tests and testing supplies) and a pharma intermediaries operation. The proceeds from these sales are supposed to go into a pot whence the company will buy back $2 billion of its stock.

2. Mike Castle

Rep. Mike Castle (R-Del.) lost a hotly contested primary campaign in yesterday's voting in Delaware. The usual characterization of this race has been that Castle represents the Republican "establishment" while Christine O'Donnell is the Palin-endorsed, tea-partying "insurgent." As my use of scare quotes indicates, I take such characterizations with more than a grain of salt -- and I don't take salt in my tea. Here's a story from Monday from the AP, about the home stretch of that campaign.

What I do know about Mike Castle, though, is that he was half of the team of Capuano and Castle. Together, he and Michael Capuano (D-Mass.) introduced the Hedge Fund Adviser Registration Act of 2009. It didn't become law as such, but it was one important step in the long legislative history that led to Dodd-Frank, the bill that did become law (with Castle's support)in July 2010.

3. Casey's General Stores

The logic behind consolidation in the retail "convenience outlets" market remains strong. The situation with regard to Casey's General Stores remains confusing.

As regular readers of Proxy Partisans may remember, Alimentation Couche-Tard, the Canadian convenience store concern that owns the Circle K brand, bid $36 a share for Casey's in April, and raised that to $36.75 in May. That price valued Casey's at $1.9 million.

Casey's has resisted, and to good effect. On September 1 the bid went up again, to $38.50 per share.

Even since then, there's a new suitor. Casey's has revealed that it is in talks with a white knight, 7-Eleven Inc. They are talking about a $40 a share offer, though so far that is merely vapor.

Tuesday, September 14, 2010

FASB Roundtables

The Financial Accounting Standards Board (FASB) says that it wil host two public roundtable meetings to hear what participants have to say about private company accounting and reporting issues.

The board's statement attributes to its assistant director for nonpublic entities, Jeffrey Mechanick, the following: “We want to hear a variety of perspectives on how high-quality financial reporting can be achieved while taking into account the specific needs of the private company sector.”

BTW, how cool a surname is "Mechanick"? It gives you confidence that Jeffrey M. really gets under the hood of accounting issues and isn't reluctant about using some elbow grease.

The first roundtable will take place at home, the second on the road. Here is the schedule:

Tuesday, Oct. 12, 2010
FASB Public Roundtable Meeting on Private Company Accounting and Reporting Issues
Time: 1:00-4:00 p.m. (Eastern Daylight Time)
Location: FASB offices, 401 Merritt 7, Norwalk, CT 06856

Tuesday, Nov. 2, 2010
FASB Public Roundtable Meeting on Private Company Accounting and Reporting Issues
Time: 9:00 a.m.–12:00 p.m. (Central Time)
Location: Dallas, TX (exact location to be announced later)

Monday, September 13, 2010

New Basel Rules

True to their self-imposed schedule, the top central bankers and banking regulators have announced a deal on Basel III -- the latest step in the globalization of banking regulation.

Here's the official statement.

The statement attributes to Nout Wellink, president of the Netherlands Bank, the following sentiment: "The combination of a much stronger definition of capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth."

The new capital requirements are summarized here.

The most relevant US officials are our Fed chairman, Ben Bernanke; our FDIC head, Sheila Bair; and the acting head of the Office of the Comptroller, John G. Walsh. Their agencies issued a joint statement praising the accord. "The agreement represents a significant step forward in reducing the incidence and severity of future financial crises, providing for a more stable banking system that is less prone to excessive risk-taking, and better able to absorb losses while continuing to perform its essential function of providing credit to creditworthy households and businesses," they said.

Aside from reserve numbers, the new rules have a feature known as the "countercyclical capital buffer." The idea here is that banks should have to have more capital when times are good than would be required of them in bad times. The extra "buffer" requirement is intended to dilute the booze at the party at times when credit is growing more quickly in a nation than is that same nation's underlying economy.

Sunday, September 12, 2010

Harrisburg crisis

So, what's the story with Harrisburg, PA and its bonds?

The WSJ in its weekend edition said: "Officials of Harrisburg ... and the state of Pennsylvania are considering several options, including a short-term bank loan, to help the state's debt-laden capital avoid default on a general-obligation bond payment it is scheduled to make in the coming week...."

As Mr MacKay, of South Park Elementary, would put it: "defaulting is bad, mmm-kay?"

An energy incinerator project seems to be at the heart of the crisis.

The whole thing reminds me of Orange County, Calif., in 1994. Except Harrisburg doesn't have the enviable climate of Orange County.

Fiscal officials in Harrisburg can draw some comfort from this. Their chief OC counterpart, Robert Citron, never actually went to prison. He did 1,000 hours of community service, and five years of supervised probation.

Stupid time.

Wednesday, September 8, 2010

AuthenTec and UPEK Announce Merger

On Independence Day this year I said that UPEK "has now given up on" its efforts to merge with Authen Tec.

Authen Tec is Florida based, UPEK is a California company. They are both in the biometric identification market -- fingerprint recognition doodads and stuff.

But the merger will go forward. A friendly deal has been reached. This will be accomplished as an Authen Tec purchase of UPEK rather than, as once expected, the other way around.

The two firms have of late been adversaries in IP litigation. In May of this year, the Northern District for the District Court of California, in San Jose, issued this procedural ruling in that case. I haven't kept up with it since, but imagine that the new combined company won't continue suing itself.

Tuesday, September 7, 2010

I Love These Google Images

In the case of each of these many images, somebody somewhere decided that the graphic would serve some purpose in explaining how risk management works. Perhaps some of these were first a powerpoint slide.

You have to appreciate the third one from the left on the top row.

I hope all my readers enjoyed their holiday weekend.

Monday, September 6, 2010

Eli Lilly and a generic

The U.S. Federal Circuit recently upheld a district court on a patent law matter concerning Eli Lilly's drug, Evista (chemical name, raloxifene).

The district court enjoined any manufacture or distribution of a generic version of raloxifene, which is used in the treatment of osteoporosis in postmenopausal women.

The defendant, Teva Pharmaceuticals, disputed the validity of Eli Lilly's patents on the ground of obviousness. In the words of the court, Teva contended "that the Bone Loss Patents or the Low Does Patent would have been obvious to one of ordinary skill in the art."

In finding nonobviousness, the Federal Circuit discussed an earlier study of te use of raloxifene, the Buzdar study, under the heading of "prior art." The critical fact here is that the Buzdar study failed, and "in light of Dr. Budzar's published report describing that failure, the district court correctly found that a person of ordinary skill would have been discouraged from using raloxifene" in further tests. Thus, the scientists working for Lilly were using something more than ordinary skill, and the patent is upheld.

Sunday, September 5, 2010

Aleynikov Wins a Round

In July 2009, FBI agents arrested Sergey Aleynikov, who had formerly worked in the high-frequency trading business of Goldman Sachs Group Inc.

High-frequency trading has become a good deal more prominet in pubklic/regulatory controversies in the intervening 14 months.

But for what exactly was Aleynikov arrested? The charges were: theft of trade secrets; transportation of stolen property in interstate commerce; and illegal access to a computer without permission. The arrest came soon after Aleynikov had left Goldman, and started work for Teza Technologies. Allegedly, Aleynikov had copied and encryptred files from a Goldman server, uploaded those files to a website, then later to a portable memory device, so he could share it with his new buddies as Teza.

Why bring this all up now? Because I see that a Manhattan district court judge Denise Cote has just dismissed one of the charges, unauthorized access. Aleynikov's alleged actions took place in his final days of employment at Goldman, when he did still have permission to access the firm's computers, and Cote found that he did not exceed the authorization he had been granted.

Prosecution will continue as to the other counts, but this dismissal does show that these sorts of actions are very difficult -- prosecutors have a tough time prevailing.

Which is as it ought to be.

Wednesday, September 1, 2010

Bankruptcy and Disclosure

The bankruptcy case concerning WMI, the former holding company of WaMu, continues its slow-paced way through the pertinent court in Delaware, under the guidance of Judge Mary Walrath.

On August 30, the consortium of trust preferred security holders (the TPS consortium) filed a motion that the debtors be deemed to have made certain admissions.

The WMI litigation was at one time chiefly a dispute between the debtor estate itself, on the one hand, and JPMorgan on the other., Back in the chaotic autumn of 2008, the FDIC seized WaMu, ran a quick min-auction, and sold it to JPMorgan. Everything was done so quickly that there was no real sorting out of the assets -- what belonged to the holding company, which thereafter declared bankruptcy, and what belonged to the operating company, which was now part of JPM.

So those two sides fought out the allocation of assets in bankruptcy court. They have more recently kissed and made up. Their making up is known as the "global settlement." But ... not so fast! says the TPS Consortium. "We're not sure we want you guys to make up."

Go here and then go to page 12 of that PDF. That was a letter written July of this year.

In the money quote, TPS says that in the pre-settlement litigation, "Debtors made numerous claims of value purportedly owned by, or owed to, the Debtors, which claims, if successful, could have resulted in significant distribution to creditors in these cases, including members of Class 19. But, prior to entering into the 'global settlement' to compromise substantially all of those claims (including claims as to the ownership of the Trust Preferred Securities), the Debtors had conducted, in the view of the TPS Consortium, minimal (and in some cases, perhaps, no) discovery or analysis of such claims. Moreover, it appears the Debtors’ attorneys responsible for negotiating the 'global settlement' had potentially disabling conflicts of interest with certain parties who, under the settlement, would receive significant additional benefits, including, without limitation, JPMC."

Bottom line? TPS wants to derail the settlement.

Enough background. Now we're back up to this week. On Monday, TPS filed its "motion to deem all requests admitted." Why should the court "deem" this? Because the debtors have been evading requests for admissions where TPS is, according to its attorneys, entitled to a yes or no answer.

"Debtors’ response is wholly inadequate because it is riddled with boilerplate
objections that cannot be sustained. In particular, Debtors make fourteen general objections (the “General Objections”) to every request and further object to every request as “vague, ambiguous, overbroad and unduly burdensome.”

"Debtors further improperly assert the attorney-client
privilege and work-product doctrine claiming that general facts are privileged."

The requests are, for example, that: "Counsel for the Debtors, Weil, Gotshal & Manges LLP, et al., were the sole negotiators of the Proposed Global Settlement Agreement for the Debtors."

Presumably they are asking this because they want to argue that Weil Gotshal was conflicted, and its conflict of interests should void the settlement. If they were the "sole" negotiators, the route from point A to point B is straighter and narrower.

I'll keep an eye on this.