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Maximising Shareholder Value (LOL)

August 2, 2012

We always laugh-out-load (lol) whenever a pension fund or hedge fund manager publicly complains or laments that a company in their portfolio is “not maximising shareholder value” and that it needs to do something else or to do more of something but not necessarily of what, exactly. What the manager is really saying publicly is that they (the manager) have made a bad decision and an undue diligence and can’t find a greater fool to buy the stock from them at a higher price. Oh well. Guffaw. However, the effect of this drama on the current stock price is unpredictable and one doesn’t always know who will benefit or how they will do it. After all, if the stock price goes down, they might buy more or benefit from a short position.

“Maximising shareholder value” is also not the same as “optimizing shareholder value” because the former has a near-term walk-away aspect whereas the latter has a longer term investor aspect and one must, in reality, rely on the management of the company to do the best that they can with the resources and challenges that it has. As “shareholders” we are usually in the second-hand market and just buying and selling the company’s outstanding common shares to each other. What do we really know about running the company itself? And how should its management, which has undoubtedly earned its spurs with more than just its idle cash, be suddenly less competent than we?

From a mathematical point of view, “maximising shareholder value” would also suggest a point or differential estimate of the price which is, therefore, unstable whereas “optimizing shareholder value” would generally include many factors, over time, and suggests a Nash equilibrium (of which there are, generally, many) as the best outcome for both the company and the shareholders.

Although there are dozens of recent examples that support our argument (lol) in these times of  “activist managers” and “alternative investments”, the recent case of CP Canadian Pacific Railway Limited shows that something else might happen.

Based on the above chart, we have had CP in our portfolio since early 2009 at $40 and still hold it now at $80. The company has always paid a dividend of at least $1 a share since 2009 and recently (April) raised it to $1.40 paying out about $240 million per  year to the common shareholders although we also note that CP has recently sold about 1 million new shares from treasury to raise about $55 million in cash and increased its long term debt by a further $70 million.

Should we believe that “investor activism” has added nearly $1 billion to the market value of  CP since March of this year? What caused it to run up from $60 to $75 in the previous six months? Could it have been that the company was just doing something that the investors “liked” and had confidence in for the future?

All of that is anecdotal and really none of our business. The only reason that we have ever had for owning CP is that the stock price (SP) exceeds the risk price (SF) and it is, therefore, a (B) and has remained a (B) despite the significant management and ownership changes that have occurred since April. (For more on this, please see Stock Prices Are The New Pink or Capital Safety in the Market Lane, June 2012.) However, demonstrated volatility suggests that CP has a downside of $9 in the next three months and a stop/loss at $75 would sell us out even if we didn’t want to go. Hence, we bought a put at $80 for December 2012 which cost us $400 per hundred shares and partially offset the cost of that with a sold call on our long position at $90 for a gain of $165. Hence, for a net cost of $2.35 per share, we don’t really care what the stock price is for the next six months and we’ll also be getting – if all goes even somewhat well – $1.40 in dividends through the end of year and still own the stock worth no less than $80 (to us) but no more than $90 unless we buy back the call – and we have lots of time to decide that.

Now, that’s “shareholder value”. It’s

“Alpha-smart with 100% Capital Safety and 100% Liquidity” Guaranteed.

Anything else is just a bad “whinge” and should be sent back.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”.

Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability.

We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now.

The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”,  ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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