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business newsAlcoa: Financial Staying Power in 4D
By
Peter Atwater
Mar 17, 2009 10:45 am
Keys to surviving the crunch: dilution, dividend cuts, disinvestment and divestitures.
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More specifically, it's going to a) raise over $1.1 billion in new common stock and convertible debt to repay bank borrowings under its revolving credit facilities, b) cut the common dividend from $0.17 to $0.03; c) reduce capital expenditure and d) exit 4 businesses and sell shares of Rio Tinto (RTP), which it held in a special-purpose company.
In summary, the 4 Ds - dilution, dividend cuts, disinvestment and divestiture.
My purpose in highlighting Alcoa’s actions is neither to criticize nor to praise, but to focus on the long-term consequences of the company’s actions in the context of future earnings per share. Over the past 25 years, common shareholders -- not just at Alcoa but across the S&P 500 -- have benefited from the cumulative opposite to what we're experiencing today – earnings per share growth fueled by debt-financed stock buybacks, dividend increases, and increases in both capital investment and acquisitions (also often funded with high levels of debt).
Now the pendulum is swinging in the other direction, and corporations like Alcoa, out of a need for financial staying power, are acting accordingly. They're shrinking.
But, when I look at S&P earnings forecasts for 2010 and beyond, few seem to adequately incorporate the 4 Ds of financial staying power. Instead, earnings-per-share growth reflects intact entities’ rapid return to a 1990’s type economy, not re-sized businesses positioned for a prolonged downturn.
In reviewing balance sheets, I would recommend that Minyans focus more on whether a corporation is prepared for an extended downturn, rather than how poised the business is for rebound. As we're seeing across any number of industries, the price to common shareholders of preparation at this late stage is prohibitive. (For example, in Alcoa’s case, issuing new stock at prices not seen since the late 1980s.)
But those companies that want to make it don't have a choice. They must prepare or they will perish.
And so too must their investors.
Positions in SPY, JPM
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