Category: Finance

There are two ways you can ultimately realize cash from an investment.

One is that the company issues a dividend. The second is you sell the stock (whether it is forced upon you or not – for the purposes of this post, I am assuming that your shares are not being forcibly bought out).

There is a whole bunch of academic literature on question of whether dividends or share buybacks are the best form of returning cash to shareholders. In theory, when removing the impact of taxes and transaction costs, there is an indifference between a dollar returned via dividends or through share buybacks. However, the cliche of “in theory, theory and practice are the same, but in practice they are different” applies.

Since I can remember, the debate whether dividends or share buybacks provide the superior return mechanism has resulted in very different philosophies between various management teams.

The core issue is that a dividend triggers a tax hit today (in addition to the top marginal rate being significantly more expensive for a dollar of dividends versus a dollar of capital gains) while a buyback is perpetual (to the extent that management doesn’t mess up and issue shares for cheaper later!) and cumulative. A buyback does, however, trigger a 2% share buyback tax in Canada which does offset this differential somewhat. A buyback also has the effect of elevating a company’s share price for a temporary period of time due to the demand on the stock during the period of the buyback – this will also elevate the cost to shareholders for management compensation as in many cases there are RSUs, options and other stock price-linked financial instruments that will accrue to management’s pockets.

Over the course of a couple decades, I’ve assembled my practical rules of caution concerning companies that engage in share buybacks:

1. If the company’s balance sheet is debt-laden, be very cautious when they execute share buybacks and considering paring, if not outright selling entirely the company.

and in conjunction – 2. If a company decides to incur additional debt in order to buy back shares, be cautious.

Rule 2 is due to a “non-debt laden” company deciding to take out debt in order to repurchase shares.

Needless to say, if the company’s balance sheet has other priorities, stock buybacks can be very dangerous to a company’s financial health.

Essentially management is making a decision that the cost of their debt is lower than what returns will accrue to the shareholders. From a metrics-perspective, this will increase the return on equity but does not increase any fundamental profitability of the company itself. As long as these calculations are correct and the company can continue to deliver sustained profitability at or greater than the cost of debt, coupled with the gross amount of debt not presenting any liquidity/solvency challenges when it comes time to roll over said debt, it will give the present shareholders a one-time boost.

Ag Growth (TSX: AFN) (late 2024/early 2025) is a poster child for this rule. They repurchased shares in the upper 40s and the stock is now sitting at $14 – with a looming refinancing on the horizon.

Dye and Durham (TSX: DND) is another great example – in fiscal (June 30) 2023, they repurchased $223 million in stock. The buyback was entirely funded by debt.

This category also covers the cases where companies are performing significant amounts of expansionary capital expenditures at the same time as executing a share buyback – capital that otherwise would go to expanding the profitability of the business is instead directed to share buybacks – why not just allocate it all to the capital project (or acquisition)?

3. If the company’s management performs a buyback when share prices are at all-time highs, be cautious and consider paring into the demand.

Many tech companies have gotten in trouble with this rule – valuation insensitive buybacks are destructive.

The year 2000 is littered with examples of this, but in more recent times, we have amusing examples of Silicon Valley Bank (SVB) repurchasing shares in 2022 (and going bust in 2023), Enphase buying back stock in 2022-2023 at around $200/share, etc. Lululemon was repurchasing shares at $350-450/share in FY2023-2024, and the list goes on and on.

4. If the industry is cyclical and the company is buying back stock, be cautious.

Good examples here include Western Forest Products (TSX: WEF) which repurchased about $120 million in stock (at much higher prices) in 2021 and 2022 during the Covid lumber boom, and Alpha Metallurgical Coal (NYSE: AMR) which repurchased over $1 billion in stock in 2022-2023 during the coal boom. Note that both of these companies have relatively low amounts of debt on the balance sheet presently, so they were truly disposing available cash at the time.

Teck was going to be one of these stories until they stopped their buyback after the Anglo American buyout announcement!

All of the oil and gas majors in Canada right now are gushing cash flow and are repurchasing shares at all-time highs – looking at Cenovus Energy, for example – in the past 12 months they have given out $1.5 billion in dividends, and repurchased $3.2 billion in stock. That said, the majors have mostly de-levered themselves so the “what to do with the cash” problem is pleasant for them to deal with – CNQ have decided to go with a more dividend-heavy route, and companies like Tourmaline and Peyto reject buybacks entirely.

In my experience, when a company buys back its own shares, it is more of a reason for caution than celebration. There are two cases where buybacks are beneficial:

1. Management uses an appropriate valuation metric to decide whether to buy back shares.

If a management team can restrain themselves to only repurchasing below a certain valuation, it is likely a sign of well-allocated capital. Examples coming to mind include Mullen Group (TSX: MTL), whose last repurchase was at $14/share, or Magellan Aerospace, where they last repurchased shares at an average of $15/share. Both companies have share prices in excess of this, and management has stopped buying back shares. Andrew Peller (TSX: ADW.a) repurchased a small amount of its Class A shares in the 4’s before stopping.

2. The company perpetually generates positive cash flows.

A very special case is Corvel (Nasdaq: CRVL) which has been repurchasing shares for the past 3 decades. While they have sped up and slowed down their buybacks over the years in accordance to their stock price, the buyback has been wildly accretive to shareholders. NVR is another company that has derived its returns entirely through share buybacks.

However, just because such a buyback has been historically a good decision does not necessarily mean it will be in the future – and an investor needs to always be aware of that.

If you are holding shares in a company, at the very least you do not believe it is worth selling at the current price (taking into account capital gains taxes and/or reinvestment alternatives). If a company is on the upper threshold of your valuation metric and then decides to purchase shares off the open market, there is only one good way to defend against a share buyback that is commenced for wrong reasons – and that is to sell your shares while the price of the stock is temporarily elevated by management. Chances are, after the buyback is concluded, you would likely be able to purchase shares at a lower price some point in the future.

There is no “one rule for everything” with respect to this topic – every situation has to be individually analyzed – but the above are some considerations in mind – not an exhaustive list.

30-year US treasury bond yields reached a high that has not been seen for 2 decades today.

When making financial decisions, your nominal benchmark for a risk-free long-term return is this financial instrument. Of course you have to factor in whether the US currency will actually be able to purchase anything in 30 years, this is all part of the risk equation. On the flip side, if the US Federal Reserve starts to do quantitative easing in the event of the next global depression, your trade will work out very well.

In the meantime, the higher this yield goes, the more pressure there will be on equity pricing.

Article about how a third-party ticket vending company fails to honour its agreements to sell tickets to a World Cup game to its customers: (StubHub cancels thousands of World Cup tickets, leaving fans furious and heartbroken)

He paid $11,380 Cdn months ago for a pair of premium seats to watch Canada play Qatar in a World Cup match in Vancouver last Thursday. They were to be a Christmas gift for family members.

…

“They said, ‘Everything’s fine. Your tickets are 100 per cent guaranteed. We will get back to you in two to three hours.’ That never happened.”

StubHub cancelled his order while he was stuck outside the stadium. There was no explanation, no replacement and no refund, he said.

Let’s assume the article at face value and assume its representations are true.

From a financial perspective it sounds like the business model is StubHub buying put options on tickets for free, with the full benefit of capital usage of exercising said option for free.

For example, in the above transaction, StubHub received $11,380 for 2 tickets “months ago”. As they were a Christmas Gift, assume this was done in December 2025.

StubHub thus received an interest-free loan for at least six months, coupled with a put option for the tickets – essentially they had a six month window of opportunity to purchase “premium seat” tickets for less than $11,380 and pocket the differential.

If they could not do this, then they can just say “Oops” and cancel the transaction the day of the event. Presumably this person will receive the $11,380 they originally paid.

So StubHub, financially, is realizing a value of the six month put option they purchased for free on the ticket transaction. What is the implied volatility of a world cup ticket? An interesting modelling exercise, no doubt.

Doing a paper napkin calculation, a put option expiring six months out with an implied volatility of 40%, roughly yields 10.4% of strike price.

Say StubHub’s cost of capital is 8% – when adding the option value and the free usage of capital for half a year means they netted about $1,640 for the pair of tickets without any risk whatsoever. If the tickets on the open market went “into the money”, the realized profits would be locked in, instead of theoretical. Not a bad business model, noting the other winner here is going to be Visa or Mastercard for the interchange fees.

In a world where the headline article is the USA publishing an annualized CPI for May of +4.2%, you would think that precious metals would be the recipient of capital inflows – supposedly a great hedge on inflation – as governments run higher and higher deficits and the supply of money expands to infinity, precious metals will flourish, correct?

Apparently not:

Gold and silver have been trading down, especially since the precious metals price spike last January. Somebody buying Silver at that $120 spike is sitting just under a 50% loss at present.

What do we make of these conflicting narratives?

Prices are set at the margins. It takes one trade for a price to drop from $100 to $10 – if somebody is willing to sell it at 10 dollars and nobody is willing to buy it between $10.01 to $100.

What triggers the sale? The need for liquidity – converting an asset class into cash, and this need is more than the desire of the purchasing party to pay up for it.

The advantage of owning an ounce of gold or silver is that it sits there. It doesn’t depreciate. It will be there forever, irrespective of whatever happens to the entire monetary system. The disadvantage is that it sits there. It doesn’t earn a yield. To convert this asset into something useful, you need to find somebody willing to take it and give you something in return for it that you want – typically cash. If too many people want cash, you’re less likely to receive more for it.

It is very difficult to predict the eddies and currents of when you will see demand for precious metals or seeing people needing liquidity and selling their gold and silver instead of US Treasuries or Bitcoin or shares of NVidia.

“Sell in May and Go Away” is a popular cliche in the markets – perhaps this year it is especially true. I continue to remain very defensively positioned despite the pain of seeing a USA CPI print of 4.2% and the best low-risk short duration ETF I can find on cash equivalents gives out a net of 2.6%. What will break first, the purchasing power of cash or the stock market?

The bipolar market continues – we have companies like Rocket Lab (RKLB) shooting up into the stars, presumptuously in anticipation of the SpaceX IPO, and companies like Sandisk rising by a factor of 20x over the past year.

Conversely, I am looking at most of the usual suspects in software being down for the day – ADBE, CSU, etc.

The war in the Middle East still continues and a good chunk of the world’s crude supply is still out of circulation. Every day that this continues is another layer of embedded cost in the real economy, which will take months for the ripple effects to show themselves. When the ripple effects show up in financial statements, many reactive algorithms will make adjustments accordingly.

I do note that many “traditional” names are fading away – Nike (NKE), Whirlpool (WHR), and LuluLemon (LULU) are depressed far below their traditional norms – are these brands going to be the Kodaks of this decade, where the foundation of the companies has essentially been hollowed out over time and not maintained? The only difference is that Kodak was a technology adaptation failure, while the three aforementioned companies are marketing brands, where shoes, washing machines and lifestyle clothing are less susceptible to wholesale technology changes rendering companies obsolete.

Conversely, from a broad market perspective, perhaps this is the market’s way of saying that the “death of money” is occurring – and claims on companies that produce goods and services is what is driving demand and not necessarily the quantity of earnings they derive from fulfilling such demand.

Despite having a huge cash fraction in the portfolio, my YTD is still better than the primary indexes. It’s a very odd situation in that I do not feel particularly satisfied with the performance even though objectively things from a risk-adjusted perspective can be considered borderline perfect. It’s difficult looking at these things that are going up 20x in a year like Sandisk and wondering why you don’t have one in your own portfolio. Even if you took a 2% position in the stock at the beginning, if it goes up 20x, it would balloon to 29%.