Class 1 Railroad share buyback programs

[rr503]

Do they help or hurt in the long run?

[Gilbert B Norman]

HURT;

Any kind of distribution, which share buybacks do represent, are a stark admission by management to shareholders that we cannot deploy all the cash we have on hand to grow your business - and since the share price represents the discounted expectation of all earnings this entity will have on into perpetuity, the market price of such a share. Discounted in this case refers to the market rate of interest, which is generally determined by fiat from the various sovereign Central Banks. If such goes up, those discounted earnings will be less than if the interest rate will remain unchanged or (unimaginable at present) goes down.

As such, share repurchases simply represent an artificial means of increasing the ever important short term benchmark of Earnings Per Share. Cash Dividends to many investors such as retirees like me represent some kind of windfall, but let us stop for a moment and think of the source of that windfall - from MY VERY OWN company.

A case of such is with Microsoft (Q-MSFT); "once upon a time" this company had all the innovative "bling" today associated with the likes of Apple and Google. Now it has become a bureaucracy which sits back and watches the licensing fees roll on in from the makers of desktop computers - where in the business world Microsoft OS still rules. "Once upon a time", MSFT did not pay dividends or repurchase shares and their stock performed on a par with AAPL and GOOGL. Now they pay 'em - and look how flat the stock has been even through the '09-15 "Bull" market.

The same MSFT analogy can be applied to the six (of seven; BNSF is of course the private fiefdom of Warren) publicly traded Class I railroads. Add more track capacity, buy more fuel efficient locomotives, acquire more cars, move forth rather than making like a dog knowing he is off to the vet with PTC, respond to shipper's needs rather than "expecting" they respond to yours, and on and on. All of this requires $$$$$$, and with Dividends and buybacks (repurchases) there is less of 'em to make a more perfect railroad.

[Gilbert B Norman]

While this "Heard on the Street" column appearing in Monday's Wall Street Journal does not address railroads in particular, it does address how buybacks can disguise less than stellar earnings performance:

http://www.wsj.com/articles/what-1-5-tr ... 1447007601" onclick="window.open(this.href);return false;

Fair Use:

Because they reduce the number of shares that earnings are divvied up by, share-count reductions can boost earnings per share even if a company’s overall income is stagnant or slips. Third-quarter net income at 3M, for example, was down 0.5% from a year earlier. But the company cut its shares outstanding by 4.1% thanks to the $5.3 billion it spent repurchasing stock over the past year. So, its earnings per share rose 3.5%.