In 1977, 95 percent of distributions to shareholders came in the form of dividend payments. Today, more than half of the cash returned to shareholders of S&P 500 companies comes from buybacks instead of dividends.Sounds like a decision that focused on the stock position rather than the stores -- killing the goose that lays the golden egg, as it were.
Fortune magazine, in a story about what happens when Wall Street jumps into the retail business, reports that under Lampert, Sears has gone on a stock buyback spree. Between 2005 and 2011, he took what was once the company’s strong cash flow and spent $6.1 billion of it on stock buybacks. During the same time period, only $3.6 billion was spent at Sears on capital improvements. Lampert told investors that upgrades and new stores were not an “efficient” use of capital.
Rand & Business
A site called "DeadState" -- I am not familiar with it before today -- has a post claiming that Sears was destroyed because of a CEO who decided to run it according to what he saw as Ayn Rand's principles. I'm not sure they prove their case, though. It sounds like it may be at least as true that trying to run a real business according to Wall Street principles doesn't work: Wall Street may be good at obtaining investment for businesses, and it is certainly good at digesting and re-investing resources tied up in failing businesses. It may not be very good at the long-term outlook required to sustain a successful business.
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9 comments:
Or it reduced the number of shareholders to a more manageable level.
Share price level also matters. There seems to be a sweet spot--wholly irrationally--for share pricing that maximizes capital acquisition when a new share offering is made. The Sears buybacks may have been aimed, for good or ill, at getting into that sweet spot.
As to the efficient use of capital, given the economic environment of those 6-7 years, I generally agree with Lampert--adding physical plant, or even fixing existing (I have no idea of the condition of Sears' stores) wouldn't necessarily be optimal.
Eric Hines
I suppose that driving the business into the ground while offering to buy back stock would be a good way of reducing the number of shareholders. I'd be in a selling mood.
Sears was in a bad way long before Eddie Lampert appeared on the scene, as anyone who has ever been in a Sears store or talked with a long-term Sears employee should be aware.
I don't understand why the author thinks it make a difference, in terms of the business's sustainability, whether money is returned to shareholder in the form of dividends or of stock buybacks.
Also, Sears made a devastating mistake when it closed its catalog business, circa 1993. This was just about the time when the Internet was beginning to emerge..and even if the Internet had not succeeded as a common information infrastructure, *some* form of consumer on-line services was obviously going to exist in a big way. Sears could have been Amazon.
Sic Transit Gloria.
Fair enough. I still do own some Craftsman tools, though, so I'm rooting for Sears to survive for a long time. They honor that lifetime warranty: if a hand-tool says "Craftsman," you can bring it back fifty years later and they'll swap you a new one.
And that's what I mean by long-term planning. It's why 19th-century Sears was still important in 1960, or 1980, or even as late as 2000. They didn't plan around stock positions, which change from day to day. They planned to build relationships with customers: buy our Craftsmen tools, and forever you can come back to us and we'll stand by it. Your grandchildren can bring it back to us, and we'll stand by it.
Occam's Razor: Lampert's bonus was based on stock appreciation.
You know that for a fact, Dad?
But I think Dave's point about getting out of the catalog business just before the internet took off is probably more to the point.
Sometimes things just don't work out.
Not hard to verify; get the K-10 from the IRS site for the appropriate years. It's public information (or someone at IRS can slip it to you if Lampert is an (R)).
Typical C-suite bonus programs are based on a few factors: sales (growth), profit (growth), and stock appreciation. There are lots of variations, combinations, and permutations--some quite company-specific.
That doesn't mean that it is the ONLY reason for Sears' demise. Closing the catalog was another, perhaps; the inability to burnish the "Sears" label to attract the upper-middle class, despite moving stores to U-M-C neighborhoods---
And a predator named K-Mart.
I thought Sears owned Kmart now- I think you mean Target, or Walmart...
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