Absolute Return Podcast #13: The Trade War

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May 13, 2019 – U.S. China Trade War Escalates As Trump Implements Additional Tariffs. Where Is It Heading?

Occidental Wins The Anadarko Takeover Battle As Chevron Bows Out. But Did They Suffer The Winner’s Curse?

Canada Reports Blowout Jobs Numbers With Its Biggest Gain On Record. Take a Look At The Numbers.

Uber IPO Fizzles As It Drops Below Its Listing Price. How Low Can It Go?

Why You Should Pay Attention To Share Buybacks Not Dividends

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Welcome investors to the Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies. Your hosts Julian Klymochko and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by accelerate financial technologies. Accelerate because performance matters. Find out more at www.Accelerateshares.Com.

Julian: Welcome investors to Episode 13 of the Absolute Return Podcast. Today is May 11th, 2019. It’s a beautiful Saturday out there. I’m your host Julian Klymochko

Mike: And I am Mike Keslering.

Julian: Got a lot of interesting things happening in the market that we want to chat about this week. We’ll talk about an analysis we put out this week on the blog, looking at share buybacks versus dividends and why share buybacks are superior to dividends. We are going to talk about that big Uber IPO which just went public on Friday, what happened there. Canada reported blowout jobs numbers but the biggest gain on record. We’re going to take an in-depth look at those numbers. Obviously touch on the conclusion of the Anadarko takeover battle in which Occidental ended up winning as Chevron bowed out and finally we’ll talk about the us-china trade war escalating causing some market volatility as Trump implemented additional tariffs on Friday and we’re going to talk about where that is heading.

To kick things off, the U.S increased tariffs on 200 billion of Chinese goods from 10 percent previously to 25 percent on Friday after the Chinese allegedly reneged on some of their previous commitments to this trade agreement that they have been in discussions on for a number of months. But the Chinese representatives still came to the U.S, engaged in discussions with Lighthizer and US Treasury Secretary Steve Mnuchin who claimed that two days of talks were quote constructive, which is positive. Nonetheless the S&P 500 was fairly volatile this week, dropped two percent on mostly negative trade war headlines. So, Trump defended the tariff hike and said he was quote in absolutely no rush to finalize a deal with the Chinese. Adding that the US economy would gain more from the levees than any agreement. There’s a quote from Trump saying “tariffs will bring in far more and that’s capitalized wealth to our country than even a phenomenal deal of the traditional kind. We’ll continue to negotiate with China in the hopes that they do not again try to redo a deal” exclamation point, said Trump.  Who has accused Beijing of reneging on commitments it made during months of negotiations and these trade talks have been going on months and months as we have highlighted on the podcast a number of times. Getting into the details on the latest action from the US customs and Border Protection imposed a 25-percent duty on more than 5,700 categories of products leaving China at 12:01 a.m. on Friday. The US consumer ultimately going to see far higher prices here on consumer goods, what are your thoughts here?

Mike: Yes, so just as a background. So, Trump first imposed a 25% tariff on 50 billion dollars worth of imports last July. Then he moved to a 10 percent tariff on a broader range of goods worth about 200 billion annually in September. Now raising this to 25 percent on three hundred and twenty-five billion dollars worth of imports. And as you mentioned although he talks about China paying this. As you mentioned this is the US consumer that’s paying for this.  Price of their goods are going up. In addition to this, there is you’d mention the humanitarian efforts where they’re going to be buying agricultural products at a markup, the US government to that is for about 12 billion dollars worth of goods for agricultural products and then shipping them to emerging markets. But ultimately the burden lies on the consumer.

Julian: Right, and the US government is doing that because China is retaliating by not buying US agricultural products. Specifically, I think that’s a big issue with soybeans and therefore soybean farmers are having a tough time here. But I think ultimately, they’re backing Trump. What China has been doing they have a massive trade imbalance between the countries and China’s economy is very protectionist and there’s a number of measures there that they give large advantages to domestic Chinese companies over American or international competitors. They force American technology companies to transfer their technology. There’s really zero protection of intellectual property. Privacy is just absolutely rampant. Whether it be media, software. They estimate that could be in the tens or even hundreds of billions of dollars annually in IP theft. So, I think ultimately the pressure that Trump is trying to implement on China, I think it will work to some extent. But the U.S. is really trying to create fundamental changes in the Chinese economy and Chinese laws, which seems to be a challenge. They’re not doing it easily.

But ultimately, I think the Chinese will have to just because they’re really reliant on the US consumer to power their exports. Which is you know a main portion of their economy and I think some long-lasting damage to the Chinese economy is occurring here. You hear all the time about US companies who are struggling with these large tariffs. They’re actually moving their factories from China to places such as Mexico, Bangladesh, Thailand etc. For example, GoPro, the action camera maker, they’re moving their factories from China to Mexico. You hear Apple considering starting manufacturing operations in India. Which is a big market for them. And ultimately China doesn’t want to lose their place as a large manufacturing base because that leads to loss of jobs and potential unrest within the population.

Mike: Yeah and in terms of the domestic side you’d mention the soybean market has had an outsized impact by the trade negotiations. But ultimately these subsidies will be about $1, $60, $70 increase soybean prices by $5, $7, $60, $70. But really the soy bean prices since before then have been down about $2. So, it still is a net negative for farmers in the agricultural sector.

Julian: Bottom line here, Trump claims the tariffs are good. They’re not, they’re bad. The consumer pays for them and ultimately free trade is the best path to prosperity. But ultimately what we think is going to happen, at some point they’re going to strike a deal. Trump is just using these tariffs as a bluff or try to implement pressure on the Chinese to cave in negotiations and to get a better deal for the Americans. Ultimately, I think they will get something done. It’s just a matter of time and in the meantime we will see more volatility I bet.

This week we saw the conclusion in the Anadarko takeover battle as Occidental wins and Chevron bows out. Just to recap – Chevron had a friendly acquisition deal to buy Anadarko until a number of weeks ago Occidental came over the top with an unsolicited or hostile proposal through a bear-hug letter to the board of Anadarko. At a much higher price, I believe Chevron’s was around $66 bucks and Occidental was around $76. So pretty big premium. I believe it was 22% higher. Ultimately Occidental ended up winning, but it required them to change their offer by quite a bit and the way they did that was number one, they got a ten-billion-dollar investment from Warren Buffett in a mix of preferred shares and warrants. In addition to that, actually struck a deal to sell Anadarko’s African assets to Total for 8.8 billion. Now obviously both of those are contingent on Occidental closing its acquisition of Anadarko. But the market certainly liking a Chevron backing off here and not participating in the price increases with respect to the takeover of Anadarko.

Chevron stock price rising 3.8 percent on the news with both Occidental and Anadarko falling, Occidental negative four-point one percent and Anadarko negative two-point four percent. With respect to Occidental boosting the amount of cash in their bid, initially I believe they’re around twenty two percent, no fifty percent cash and then they were lowered it to twenty two percent shares and seventy eight percent cash through the Buffett investment and the sale of the African assets to Total and one of the reasons they did that was to get around the requirement that they staged a shareholder vote to approve the share issuance required to buy Anadarko.

What the New York Stock Exchange requires is if you’re going to issue more than twenty percent of your shares outstanding, then shareholders get a vote on that large corporate action. But with the restructured deal with the new cash and share terms, I believe they’re issuing about nineteen-point nine percent of their shares. So just under the threshold and some shareholders are not happy about getting no vote on this deal. They think that it is negative for shareholder value and you had a comment from T Rowe Price on that don’t you?

Mike: Yeah. So, it’s important to, bypassing the shareholder vote is important for two reasons. T Rowe Price, which is a major shareholder of oxy who is already against the deal. Now said that they will vote against the reelection of the directors, the board of directors of Oxy because of this. Which likely won’t have an impact on the actual election. But is still acting them actively being against the management team on this. The other impact is that this reduces the lack of shareholder vote, reduces the risk of activist involvement as Carl Icahn had initiated a position in Oxy. But for any merger arbitrager, a buy side vote does have a significant amount of risk for any deal.

But the other aspect that I did want to bring up was that we meant to mention this last week, but the day before Berkshire announced their investment in Oxy. A research firm quoting data from Quandl which tracks corporate jets. They have data on corporate jets. They came up with a note saying that because of the tracking of Occidental’s corporate jet, having been in Omaha that Buffett may be investing. This was kind of interesting and then they ended up, the flight tracking service was able to capture an Occidental’s corporate jet flying to Paris. Which resulted in their deal to sell their assets to Total. Which is pretty interesting that you’re getting some of these alternative data sources.

Julian: Couple of other interesting dynamics here with Chevron bowing out. They do get to collect a 1-billion-dollar termination fee which is going straight into share buybacks. So, shareholders of Chevron like [11:57 inaudible], another interesting dynamic is, I was in a meeting with some energy executives last week specifically on the services side and they do a lot of business in the Permian here. As you remember and at Anadarko marquee assets were in the Permian and they are one of the largest producers. The number one and number two Permian producers are Chevron and Occidental. But what we were talking about was speculating on other consolidation candidates in the play, potentially Concho Resources. Which is the number three player. Pioneer, Diamondback, EOG, there’s you know we could see some more action in this play from a merger perspective and bottom line I think we can ultimately expect more consolidation in the play.

But as to wrap up this entire situation, very positive result for Anadarko shareholders. Ultimately, they got in 22 percent increase in price. Big win for merger arbs. I mean one hostile takeover battle per year, it really makes your year. So big win there for merger arbs on the Anadarko side and for Occidental, it could it be a case of the winner’s curse. I guess time will tell we’ll see how these assets within Anadarko play out. Will they be too highly levered? Well they attain all of the asset sales that they want to? Will the Buffett investment payoff? I guess we’ll see.

Mike: Yeah and lastly just to give credit to Vicki Hallub’s deal making abilities, the Berkshire and Total deals were done in a really short timeframe. So, their credit works due on from that perspective.

Julian: Yeah and the way Buffett tells it, he did this deal in one hour and that’s why he can get such a sweet deal. Because there’s not a lot of people that can write a ten billion dollar check on a handshake after an hour of discussions and so that’s why he gets the eight percent prefs plus warrant kickers that no one else gets to replicate.

Mike: And even in classic Buffett fashion where even when the deal was leaked prior to Berkshire completing it by Quandl is that they offered him the opportunity to promote one of Berkshire Holdings, NetJets. Where his comment was this would never get leaked if they were using the NetJets service.

Julian: Yeah always promoting his companies at Berkshire.

Huge jobs numbers out of Canada as economy reported absolutely blow out numbers with the biggest monthly gain on record since they started collecting data in 1976. Let’s get down to the numbers.

Canada added a hundred and six thousand five hundred net jobs in April. The bulk of which were full-time.  According to statistics Canada and its latest labor force survey, this dropped the unemployment rate to five-point seven percent down from five-point eight percent in March, consensus estimates from analysts and economists were way off on this one obviously. One hundred and six thousand five hundred that compared to the consensus as of only 10,000. So pretty big miss by the street on that. Looking at specific regions Ontario, Quebec, Alberta and PEI all saw net job gains last month. But 80 percent of the gains ultimately coming from Ontario and Quebec.

Some price action, some market action here. Interesting market action out of the loonie, the Canadian dollar strengthened to a nine day high off the report. Ultimately it rallied about zero-point six percent as investors slashed their bets on an interest rate cut this year from the Bank of Canada. I think this is the type of number where you can look at it and it’s just so good that it really has a pretty material effect on near-term monetary policy. In my opinion this takes rate cut from the Bank of Canada off the table.

Looking at the market-based probabilities for a rate cut in 2019, off the back of this report it fell from a thirty-five percent chance of a rate cut in 2019 to only twenty. So, the Canadian dollar 0.6 percent higher on the news to 1.34 per US dollar. Its biggest gain since March 29. Got a quote here from Scotia economist. He said “as much as I try to poke holes in these numbers, I can’t. You’ve got sector breadth, you’ve got regional breadth. The four biggest provinces are up. So, a very clean number very solid number and pretty significant implications for near-term monetary policy in Canada.” What are your thoughts on this report?

Mike: Yeah so just to put this number into context as well as you’d mention that it’s the largest increase since 1976 but also that the average monthly gain over the last 12 months has been about 36,000 jobs per month. So that’s you know almost three times that that average, right? So that’s a pretty crazy number. But there well one thing that the Bank of Canada does monitor for there as a key indicator is wage growth. So, wage is growing at about 2.5 percent up from 2.4 percent in March and then pay for permanent employees is actually growing slightly higher than that at 2.6 percent. So that’s also showing as a very strong indicator in that sense as well.

Julian: I want to stress to listeners, and I say this constantly after we go through the jobs numbers is you can’t put too much weight on any one jobs report. We prefer looking at say a three-month average, year-to-date, really where the trend is heading. Because these are kind of rough estimates based off surveys. But bottom line this was a super positive number. I mean the largest on record. Really can’t take anything away from that. The economy’s doing pretty good in Canada, saw the Loonie rally and ultimately, I think that takes a rate cut off the table for 2019 from the Bank of Canada.

Uber stock, its IPO fizzles as it drops below its listing price on its initial day of trading. Getting into the price action here the stock ultimately fell negative 7.6 percent and its stock market debut a rare stock decline for a heavily hyped Silicon Valley quote unicorn. Very very highly valued, very heavily hyped going into the IPO. But its lackluster share price performance comes amidst a really substantial drop for its competitor Lyft, which went public a number of weeks ago, that stock is down 29% since it did trade, did list on the stock exchange. Now in addition to that, generally rough week for the markets with trade tensions escalating and stocks trading down.

At its IPO price Uber was valued at a huge 82 billion dollars. Now that is just a massive valuation. But it is down from initial indications, initial range of 90 to a hundred billion and last year there were of a potential hundred and twenty billion valuation. That’s amidst 3.03-billion-dollar loss in 2018 from operations. So, they’re very unprofitable.

But what I wanted to highlight here is some of the shareholder dynamics. Uber was founded in 2010. 18 funds and individuals did I believe a 1.5-million-dollar seed round financing that valued Uber at about five point four million dollars. Investors paid just point zero zero nine a share. That’s less than one penny per share. Shares are now trading at where they at around $72 per share? So, a huge win there. That equates to roughly five thousand times return. Getting into that dynamic if you put a twenty-five-thousand-dollar investment into this Uber seed round nine years ago, that’s now worth one hundred and twenty-five million dollars. Truly an absolutely life-changing angel investment. You know one of the greatest of all time I’d say.

Getting into the first round of financing the seed round there’s actually a firm called First Round Capital. Had some other investors such as Chris Sacca, Lower Case, Rob Hayes. They did the next round, the Series A, ten times higher, just nine cents a share. Benchmark and Bill Gurley involved in that one. Massive win for that firm and him as well. Then the Series B, Menlo Ventures and actually Goldman Sachs got involved in this one at thirty-five cents a share. So, I believe they’re banking something like six hundred million dollars off their investment. Massive win for Goldman off that one. After the thirty-five-cent round they actually did one closer to five dollars, so four dollars and forty-five cents. And then after that you had some of public mutual funds getting in on the next round. Fidelity, Blackrock, Wellington getting in at fifteen dollars and 51 cents looking at good returns for those guys as well. But Uber is burning a lot of cash as they have done over the past nine years and had relied on financing to make up for those losses. What are your thoughts on this heavily hyped but ultimately disappointing with the lack of first day IPO pop?

Mike: Yeah and in terms of the IPO pop just in some defense for them yet the Nasdaq was down this week about 5% leading up to the IPO. So not really an ideal time. But the Uber CEO when getting interviewed by Bloomberg on Friday discussed you know controlling the things that they can control. Which is the prudent approach like you can’t control what exactly is going on in the market in the week leading up to your IPO. But the other aspect I wanted to highlight, you had mentioned Goldman’s investment in Uber. But I wanted to highlight just the Goldman versus Morgan Stanley on this deal. Where because of strongly relationships with Travis Kalanick, the Goldman bankers were in a position where they were going to be leading the IPO.

Julian: And Travis Kalanick is Uber’s previous CEO and one of the three co-founders.

Mike: Yes, yes and in a very public way was ousted from the company and so Morgan Stanley ended up winning the relationship with the new management team and it ended up being lead left on the IPO. Which is basically just leading the underwriting process for the IPO.

Julian: Yeah being the bookrunner which carries with it a certain cachet and every investment bank wants to have that, basically for bragging rights. You do get good economics though as well.

Mike: Absolutely. But in terms of those economics and to highlight how Goldman ended up winning this was because of that five-million-dollar investment. They ended up with, yeah over five hundred million dollars in that investment.

Julian: And profits from their early stage and ultimately incredibly successful angel investment into Uber at 35 cents a share.

Mike: Absolutely and then in terms of the IPO underwriting process, there were 29 underwriters and between the lead book runner and then the second, there’s about a few percentage points differences in terms of the allocation. So, they probably in terms of what the banks were getting, in terms of dollar amount for the underwriting process was around a hundred, they were splitting them around a hundred million. So, a few percentage points you know let’s say five million dollars that Goldman lost out on by losing that relationship and being second. Well they ended up making over five hundred million dollars in their investment. So still very much won that battle as well as now some of the media is critiquing Morgan Stanley’s handling of the IPO process itself. Obviously, they were trying to generate demand and hype about the IPO when they were quoting a hundred and twenty-five-billion-dollar valuation. But now after the end of the day they ended up with a valuation of around sixty-nine billion dollars. So now some of the media is critiquing them with that process. So, Goldman is now in the background with that and still generated excellent economics from there on a holistic basis.

Julian: Yeah Goldman and Morgan Stanley big longtime rivals and there are some egos involved. Ultimately Morgan Stanley gets bragging rights here for the book runner status lead left on the IPO. But in terms of pricing and valuation, an interesting aspect is that over the past three years, all the investors that bought shares in Uber haven’t made any money. Although the valuation was lower Uber has been issuing so much stock and doing so many financings that the per share value has not moved over the past year, past three years as the valuation moved from say forty to fifty billion to now seventy to eighty billion. Interesting dynamic there.

The other interesting thing I wanted to touch on was the story of how these founders came up with Uber. So, the story goes the idea for Uber came in 2008 when tech founders Garrett Camp who I believe is a Canadian. So, shout out to him there and Travis Kalanick were attending a conference in Paris and they couldn’t get a cab. So, Garrett Camp looking for a way to make personal transportation more affordable, he began working on a service called Ubercab. That’s what it was initially called in San Francisco. He was at the time CEO of a social discovery site called stumble upon. So, a serial entrepreneur, he recruited Travis Kalanick to become part of Ubercab.

A really cool thing and you can actually still see this on Twitter – Ryan Graves, the early Uber CEO and who is now recognized as a co-founder, he was an employee at General Electric in Chicago and he signed on to become the first Ubercab general manager and later its first CEO prior to Kalanick taking that back. But the way he got recruited was Travis Kalanick tweeted. I have the tweet in front of me on January 5th, 2010. He says “looking for entrepreneurial product manager/bizdev killer for a location-based service. Pre-launch, big equity, big peeps involved any tips?” Ryan Graves responds “here’s a tip email me graves.ryan@gmail.com” and that’s how he became billionaire. His stake in Uber is now worth 1.5 billion. Bottom line there, is sometimes all it takes is luck. Really luck combined with hard work being in the right place at the right time. But looking at that if you’re not on Twitter, you got to be on Twitter. Because you never know when that sort of opportunity comes up. Ryan Graves goes ahead went for it. Now his Uber stock is worth 1.5 billion all from a Tweet.

Mike: You had the takeaway there is shoot your shot I guess. But then on the other aspect of a VCs is there’s that you had mentioned the VCs that are making a ton of money on this deal. But there also were a lot of VCs that said no to the company in investing and so what you’ve seen this week was a few VCs that are honest have come out and showed some of the emails that they had traded back and forth with Travis Kalanick and ultimately their decision not to invest. So, there’s a little bit of humble pie being eaten in the VC space as well.

Julian: Yeah, we mentioned this 5000 X return, 5,000-fold return from the seed round at less than one penny per share. But this deal was circulated on a service I believe angellist run by Naval Ravikant and the Uber seed round was actually circulated to a hundred and sixty-five investors, where they’re looking to raise 1.5 million to really get the concept of Ubercab off the ground. Of those 165 investors, a 150 of them passed and missed out on this once-in-a-lifetime 5,000-fold return. 90% percent of them passed. Which was you know in hindsight you can’t say too surprising. But Travis Kalanick and Garrett Camp did have very good reputations and a track record of success with a really interesting concept. So, it just kind of gives you the sense of how difficult it is when an entrepreneur to raise money. But how bad the 150 investors must feel in missing Ubers seed stage round and that five thousand times return to give you a context of what that means. If you invested twenty-five thousand into that seed stage round, it would now be worth about a hundred and twenty-five million. Certainly, a life-changing event and you’re kicking yourself if you miss that one.

We put out a blog post this week entitled “The Shareholder Yield Dilemma, Dividends or Share Buybacks”, in which we compared historical simulated performance, a very portfolio of either share repurchasers compared to dividend payers. Just to give you some context, we have this notion of shareholders yield. Now shareholders yield is effectively capital being returned to shareholders through either dividends or buybacks. Looking at the S&P 500 and showing you how important buybacks have become versus dividends. The buyback yield is now about four percent while the dividend yield is only two percent. Total shareholder yield you know that the S&P 500 six percent and two thirds of that is the buyback yield. Straight from a monetary perspective, buybacks are double the number of dividends. But all the time we’re hearing from investors, what’s the dividend? Dividend yield, we are dividend investors and I think that focus on dividends is really misplaced and we’re here to tell you that “buyback yield yes, dividend yield no”.

So, let’s get into some of the numbers here. What we did, we ran 20 years simulation of portfolio separated into deciles. Specifically, we looked at the top decile or top 10% compared to the bottom decile or bottom 10%. The first simulation was on share purchasers in Canada. Top 10% would be the companies that bought back the most stock over the past 20 years and that is rebalance on a monthly basis that repurchase their portfolio versus the bottom 10% or those companies that issued the most number of shares over the past 20 years. Getting into performance here, the top 10% of share repurchasers, this portfolio returned 1,400 percent over the past 20 years versus the bottom decile, which consists of companies issuing the most amount of stock or diluting their shares. They returned only 50 percent. This top 10 percent compounded at fourteen-point four percent annualized. Which was north of 12% per year greater than the bottom 10%, which only compound at roughly 2% over the past 20 years.

Looking at dollar figures, $100,000 investment into the top 10% of share repurchasers yielded an investment of 1.5 million dollars over 20 years. Certainly, a very successful strategy when companies repurchase their stock. Equivalent data in the U.S, nearly equivalent. Their top decile share repurchases return nearly thousand percent over the past 20 years or 12 and a half percent annualized. A portfolio of the bottom 10% of stocks ranked by share repurchases or those actually issuing stock did a negative return over the past 20 years minus 23 percent loss turning your 100k investment into just seventy-seven thousand dollars. Very large divergence between companies buying back stock. Which have market beating returns, compared to companies issuing stock. Which typically trail the market pretty substantially. I want to compare that to share dividend payers. We look at the top 10 percent of dividend payers versus the bottom 10 percent of dividend payers and there really is not much of a difference in terms of total shareholder return over the past two decades. They both returned roughly eight percent per year over the past 20 years. Which is kind of similar to what the market did, and we see that effect in both Canada and the US. So, bottom line from that is buybacks we feel have good predictive ability in terms of positive share price performance. Going forward while dividends really are not a robust factor, you do not see a divergence between top decile and bottom decile performance. It’s nearly zero. You look at the top 10 percent versus bottom 10 percent on the share repurchases and you’re getting a spread of you know twelve and a half percent annualized yearly. So, a massive alpha spread available on a long short portfolio of share repurchases.

Ultimately, we think this is a huge win for buybacks vs. Dividends. We are going against the grain and saying that investors should not focus on dividends. They should focus on buybacks. Not only do buybacks account for twice as much weight in the total shareholder yield. This means that companies are now allocating twice the amount of money to buybacks compared to dividends. But number two and the most important thing is that buybacks have a much more important effect on go-forward total shareholder return than dividends do and it’s not even close. So, when you’re investing, forget about dividend yield and just focus on buyback yield, if you’re focusing on shareholder yield.

Mike: Also, there is a negative connotation with share buybacks that a lot of people in the media will discuss that really like that it’s a net negative that having buybacks is a company just not investing further into their business. Which does is a valid point to a certain extent. Although as a manager the ultimate goal should be to compound capital at the highest rate and so if you’re able to invest back into your company at a higher rate than any sort of project or capital expenditure, then you should be doing that. You should be trying to get the highest return for shareholders and so with the negative connotation of buybacks, it would be a shame if ultimately these were not allowed anymore. Which has been the case in historical sense, so in the U.S.

Julian: Yeah, I agree that. That criticism is really misplaced. It’s due to a misunderstanding. A lot of critics say instead of buybacks, they should be allocating capital to growth, investing in R & D, jobs, PP&E; plants property and equipment and really focus on investing in the economy. Perhaps paying their employees a higher wage. But you know the proof is in the pudding. You look at the numbers and companies buying back their shares outperform. So, what do you expect companies to do? Shareholders demand a shareholder return and if you as manager and the board aren’t providing that, then the true owners of the company the shareholders will put something in your place that can ultimately drive shareholder returns. Because why else would you ever invest your money? You expect a good return and if you’re not getting that return, then you sell the stock or make a change.

The other common criticism that we heard and frankly I just heard it in The Globe and Mail this morning is that share repurchases are quote manipulating earnings per share by reducing the number of shares outstanding. So, if you do a share buyback all else being equal in terms of net income, if you have a lower share account then you will have just by logic higher earnings per share. But in no means is this manipulating anything. You know this is just straight economics where the goal of management, the goal of the board is for per share growth.

As we discussed on Uber where they were constantly raising money at higher and higher valuations, but the same share price. And shareholders are unhappy about that. Because none of them made money over the past three years, none of the employees. Their stock options have gone nowhere, their equity compensation has gone nowhere. So, management’s goal is to drive per share value and you can do that by buying back shares. That’s as good as anything else. Be it revenue growth or M&A; or any type of other value creating initiatives.

So that wraps it up for Episode 13 of the Absolute Return Podcast. You can listen to us every week. Find a past episodes at www.absolutereturnpodcast.com and if you enjoy it, be sure to give us a rating on Apple iTunes and we will chat with you next week, Cheers.

And that’s it for Episode 12 of the absolute return podcast. You’ll hear back from us next week. To anyone at Berkshire Hathaway’s meeting hope it’s going well and I’m sure we’ll be talking about that on next week’s podcast. Be sure to follow us on Twitter, check us out at AbsoluteReturnPodcast.com for additional episodes and we’ll chat with you next week. Cheers.

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