Concrete plans in today’s world might be difficult because of uncertainty. However, uncertainty has been around a long time.
Peter Thiel wrote in Zero to One, 2014 – “US companies are letting cash pile up on their balance sheets without investing in new projects because they don’t have any concrete plans for the future (p 77).” The top 10 companies in the 2020 Drucker Institute Company Rankings are in order 1 to 10, first row then second row. For all the details of the Drucker Institute Survey follow the link: https://www.drucker.institute/programs/company-rankings/
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Microsoft |
Apple |
IBM |
Amazon |
Alphabet |
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Cisco |
Intel |
P&G |
J&J |
HP |
The total cash on their balance sheets in 2019, the last year reported numbers available for all is over $594 billion. In 2014 when Thiel wrote Zero to One the amount for the same 10 companies was $99 billion. What do you think about the increase?
What about the company that you lead or are an employee? How much cash is on your company’s balance sheet? What is planned? What is leadership investing in for the durability of the company? Any investment in new equipment, technology, innovation or facilities?
What new products or services have been introduced by any of these companies since 2014? What new products or services have been introduced by your company?
Why are corporations allowing cash to sit on their balance sheets? Is it for a rainy day? If not for expansion, new products, services then what? One concrete plan for corporations that they are communicating, stock repurchase. What is the rationale for repurchase of stock? Stock repurchase does not add to growth in sales or profits because of new products or services brought about by innovation nor does it optimize the existing business. There are benefits to the overall repurchase plan. Who benefits from re-purchased stock?
Investopedia stated this about a corporation buying back its stock. “Companies issue shares to raise equity capital to fuel expansion, but if there is no potential growth opportunities in sight, holding on to all that unused equity funding means sharing ownership for no good reason.” This sounds a little like Theil, no concrete plans, let’s shrink the ownership base. Is this the rationale?
How much stock has your employer repurchased in the past 5 to 10 years? What new products or services has your employer introduced in the same period? Are revenues and gross margin improving year-over-year? Peter Drucker explained that the existing business needs to improve year-over-year to fund innovation which is the future. If the corporation doesn’t have improving the existing business and innovation as part of the concrete plan, what future is there for your employer?
Peter Thiel recommended corporations avoid seeking a competitive advantage because it only leads to lower revenues and smaller margins. What increases revenues and margins is new, completely new, zero to one. Thiel described this in his book, Zero to One. This leads to a market dominant position, increases in revenues and profits.
Let’s go back to repurchase stocks, what does it do?
- Reduces the number of outstanding shares. This alone could drive up the share price. Apple for instance for the past 7 years has almost 1/3 of Apple shares removed from trading (2.5 billion shares/ $327 billion, average price $131 per share). Apple has averaged 5.4% repurchase of its shares annually since 2013. (https://investorplace.com/2020/01/apple-stock-gets-boost-buyback-program/ and https://www.aboveavalon.com/notes/2020/4/23/apples-460-billion-stock-buyback.
- Microsoft from 2017 to 2019 repurchased 419 million shares for $35.7 billion https://markets.businessinsider.com/news/stocks/microsoft-stock-price-hits-record-high-on-buyback-dividend-plan-2019-9-1028538625?op=1
- Microsoft and Apple are #1 and #2 in the Drucker 2020 Rankings. The cash on their balance sheets in 2020 totals over $328 billion
- Through research, corporations will sometimes borrow money to repurchase shares of stock
- Less outstanding shares increases EPS
- The effects on dividends – same total amount of dividends paid equals more dividends per share
- Not mentioned in any article from research – if CEO compensation plan is structured with stock performance would this impact CEO overall compensation?
The existing business and innovation are two key elements for any company. It takes work to improve the existing business year-over-year. It is essential in order to fund the innovation for the future durability of the company. Innovation is defined as “changing the yield of resources or changing the value and satisfaction obtained from resources by the consumer (Drucker. Innovation and Entrepreneurship. P37).” Any company needs these both to be focused on results and part of the concrete plans going forward. Otherwise, the future may not be long lasting. What concrete plans for the existing business and innovation are underway at your employer or the company that you lead?
Innovation Advantage LLC helps clients with both the existing business and innovation. Both are inseparable.