The Economy

What statement do you think you are making when you keep doing these posts?

The people who own CVS Health are not bad people because they are in business to earn a return on their investments.

Companies that are successful earn profits (which is what draws capital). The ones that are well run, look around at all the things they can do with those profits. They might try to grow the business by reinvesting those profits, if they think they have ways to make the business even more profitable for the owners. Or if they don't see a way to do that (and it is really difficult to do, innovation and finding products that others want is really hard to do), they might decide instead to return those profits to the owners of the company in some way. Share repurchases are a form of that. There is nothing inherently good or bad about it. You have earned money and you are trying to find the most productive use for it given the business conditions, economic conditions and "regulatory" conditions that you are operating in.

People put their capital at risk to earn a return. If that wasn't the motivation. ... nobody would put their capital at risk, and we'd be much worse off for it.

 

A public company should always be focused on shareholder returns. Management works for those shareholders, Those shareholders own the company. Most companies that are successful are working to create returns for the owners of the company.

As an outsider whose capital isn't at risk, and who isn't an owner of the company, you may have your own ideas about how they should best spend money. But the whole "share repurchases, bad" thing is not just wrong, it's overly simplistic.

For one, the environment for running a business in this country has been so remarkably screwed up, not just because of increasing government regulations that hit businesses like theirs, but because of the distortions a batshit crazy monetary environment created. Most of the buybacks we have seen over the last decade were not companies using profits to decrease their float, it was them being heavily incentivized by intentional debt market manipulation to get them to borrow a ton of money. The money was available to them (in a free market, lending risk would self regulate that and keep it from happening) at zero cost in real terms. You can argue that they were actually following the best recipe available to them, because doing share repurchases and blowing up the price of their stocks made the owners of those company way more money than trying to do CapEx that offered little opportunity to pay off in what has really been a mostly stagnant economy would have. Remember, their companies were not producing profits to create that money to buyback stock with. So it should make sense that they were not seeing viable opportunities to try to invest in. It's also why outside of the public markets, what we were seeing from all the trillions of dollars of cheap money that was unleashed were start ups with stories (but no business) being able to borrow insane amounts of money and just keep rolling over debt endlessly. ... without the businesses ever becoming profitable or viable. At the extreme, it gave us FTX.

But what happened in November when CVS announced those share repurchases? CVS is actually a pretty indebted company (almost everyone has become one, because it paid to), but. ... 1) we are now in a rising rate environment that is making the cost of money more expensive and 2) CVS has been PAYING DOWN some of that debt because they are responding to the incentives in front of them and actually have a profitable enough business to do it, and 3) They are not borrowing money and doing share repurchases. They are buying back that stock with money they actually have earned.

And if you look at what they are doing, 1) they are not only paying down debt right now, 2) they do still do some CapEx (it's a company that has done a lot of acquisitions to try to grow where they believe they can), and 3) they are buying back stock. When you are buying back stock under these circumstances (you are using money you earned, not borrowing because the money is cheaper than free), the reason tends to be that you actually think the stock has gotten cheaper than it should be and it is the best use for that portion of your profits that you're trying to figure out what to do with.

Maybe they are wrong, the stock has only gotten cheaper since they announced those repurchases (and maybe they think they are getting an even bigger bargain now as they continue to reduce the float). But when they made that announcement, their stock had peaked in early 2022 and had been getting cheaper throughout the year.

 

Dunno the company you are talking about, but are their properties net lease assets?

 

Yeah, that is a "net lease property" REIT. It's an interesting business in a lot of ways, they are usually single-use, single store businesses. The tenant pays all the expenses, taxes, maintenance, etc.

As an investor, you collect a dividend (in their case every month instead of quarterly, which is one way they try to distinguish themselves) and it can be really stable income. ... especially when interest rates are stable (and low).

I don't know their business well, but I know Realty Income is a gorilla, has been around a long time and the stock fetches a premium compared to a lot of other REITs, and it's considered a relatively conservative income investment. They have increased that dividend every year for more than a quarter of a century.

What you are into is more like bond investing than equity investing. These kinds of REITs are considered bond proxies. The inflation we are seeing actually makes them less attractive than they had been. The reason I asked you if it was doing net lease properties is in the current environment (rising rates, trying to battle inflation, which means slowing down the economy), I would be frightened by anything that was leveraged up, and I am willing to bet that there are a number of net lease REITs that got sucked in, and started leveraging up to finance more properties than they should have. And that would create a double whammy because the rising rates will eventually cripple them, and if the economy really does slow significantly, you are staring at defaults.

I breathed a little sigh of relief when you said Realty Income, though. I don't know what their portfolio looks like, or even what their debt/equity ratio looks like, but I assume a company like that is going to be on more solid footing, way more conservative, than the kinds of REITs I was talking about.