Mazimize Shareholder Wealth

The goal of a corporation should be to maximize shareholder wealth. Why? Since shareholders have a residual claim, if they are happy, everyone in line before them such as creditors and employees have been financially rewarded. In a new book, Lynn Stout argues that increasing shareholder value is not the goal of a corporation. In fact, her argument extends to the notion that shareholders do not own a corporation, a strange argument from a law professor. She states "No human being can own a corporation-they are independent legal entities," which makes little sense since ownership of stock confers a legal ownership of a corporation. Our response is best summed up by Charles Elson: “What [Professor Stout] is saying is nothing new and is actually quite silly.”

Another argument we disagree with is that corporations sacrifice long-term goals for short-term profit. While we don't disagree that this happens, sacrificing long-term shareholder wealth maximization does not fit with the goal of maximizing shareholder wealth. Choosing short-term results over long-term results is an agency problem that needs correction if it occurs, but not at the expense of shareholder wealth maximization.

Finally, we would like to address the statement made by Professor Stout that companies "...drain out cash through stock repurchases and dividends - all for the purpose of pumping up the share price temporarily." The relevance of dividends and stock repurchases is discussed in the text, but if the company has no positive NPV investments, excess cash should be paid to shareholders. Additionally, given that the S&P 500 companies (excluding financials) have a near record level of cash, we would argue that if anything, companies have not paid out enough to shareholders in the form of dividends and share repurchases.

What Are The Odds?

With the Powerball jackpot reaching $500 million, lottery ticket sales are very brisk. So what are the odds of winning? 1 in 175 million. You would have a better chance of randomly predicting the name of a female in the United States (1 in 157 million). While the jackpot is announced at $500 million, it is actually paid over 30 payments with the first payment being made today. If the winner selects the cash option, they will receive "only" $327 million. So, with equal annual payments, what interest rate is being offered? Check for yourself that it is about 3.24 percent. 

HP Write-Off

HP announced an $8.8 billion write-off associated with the company's purchase of Autonomy, a British software company HP purchased for $11 billion last year. The reason for the write-off is that HP discovered Autonomy misrepresented not only its past performance but its prospects going forward. The fraud was evidently well hidden as the purchase was audited by Deloitte, which itself was audited by KPMG. HP has filed a complaint with the SEC as well as British securities regulators, with the hope that criminal charges will be filed. Civil charges against the officers of Autonomy also appear to be forthcoming.

A Christmas Present From Walmart

Walmart announced that it was moving its next dividend payment to December so that investors could enjoy the lower dividend tax rate of 15 percent, rather than face a tax rate of up to 43.4 percent (including the healthcare dividend tax) beginning in January. Walmart's total dividend payment is $1.34 billion, so investors will likely save millions of dollars in taxes, a nice package under the Christmas tree.

Twinkies Disappear

In a sad day for junk food lovers everywhere, Twinkies maker Hostess Brands has asked the bankruptcy court judge for permission to liquidate its assets. The company blamed a strike by the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union (BCTGM). The company will continue to ship products until inventory runs out. Of course, Twinkies will likely make a comeback. It is likely that another bakery or private equity firm will purchase the Twinkie name in bankruptcy and bring back the familiar yellow treat.

Stock Certificates Damaged

The flooding in New York from Superstorm Sandy hit the vault of the Depository Trust & Clearing Corporation (DTCC). While the DTCC is relatively unknown, it holds $35.6 trillion in securities and settled nearly $1.66 quadrillion in trades during 2010. The DTCC is the primary clearinghouse for securities in the U.S. The job of the DTCC is to keep track of the trades made in stocks, bonds, and other securities and track who owns those securities after each trade. Many financial instruments, such as Treasury bonds, are book entry only. This means that ownership of a particular Treasury bond is electronically recorded, often at the DTCC. Physical stock and bond certificates have been rapidly declining in favor of the book entry system, although as the damage from this flooding shows, there are still a significant number of physical financial certificates.

Dividends Jump Before January?

With the impending dividend tax increase from 15 percent to 43 percent, at least some companies are paying special dividends before January 1, 2013 to allow shareholders to be taxed at the lower rate. For example, The Buckle announced a special dividend of $4.50, more than 10 percent of its stock price and Commerce Bancshares announced a $1.50 special dividend.