Confusing Capital Allocation – Transforce

Transforce (TSX: TFII), now known as TFI International, announced their year-end earnings today.

This post is less concerned about the results (they did a good job generating plenty of cash and reporting a year-end net income of about $4/share), but the following paragraph:

CASH FLOW
Net cash from continuing operating activities was $665.3 million during 2019 versus $543.5 million the prior year. The 22% increase was due to stronger operating performance and the impact of the adoption of IFRS 16. The Company returned $336.4 million to shareholders during the year, of which $80.7 million was through dividends and $255.7 million was through share repurchases.

$255.7 million returned from share buybacks (and mostly purchased at a cost lower than the current stock price which is about $44/share).

However, the next press release is for a 6 million share public offering to list on the NYSE.

There’s two issues here.

One is that a 6 million share offering will raise about CAD$264 million gross, or roughly CAD$250 net after offering expenses, assuming the stock doesn’t tank tomorrow. This is approximately the amount the company bought back in shares in 2019.

The other is that (just like Target), the logistics of Canadian companies operating in the USA is fraught with new risks and dangers. TFII already operates across North America, so it is not like they will be new at it, but the observation is they are trying to move their “centre” south. It’s probably more of an indictment on what management thinks of the current economic climate in Canada.

Management does have a relatively good track record on capital allocation, but the buyback “and let’s do an IPO!” is confusing.

However, in fairness to management, their balance sheet is looking a little debt-heavy and de-leveraging might not be a bad decision in case if this future recession (which is almost cemented into mythology) occurs.