What does a BIDEN Presidency look like?

[The Minsky Moment]

Quick google search indicates that hurdle rates in the US private sector have held pretty consistently in the 12-14 percent range.  I would not be in the least surprised to learn  that similar rates are lower elsewhere. Hence the TSMC example.

[alfred russel]

Quick google search indicates that hurdle rates in the US private sector have held pretty consistently in the 12-14 percent range.  I would not be in the least surprised to learn  that similar rates are lower elsewhere. Hence the TSMC example.

I'd have to look up our us wacc but I would bet it is under 6%. For a large multi national like apple or Microsoft, I'd be surprised if it is double digits. The debt side of the equation is going to be trivial and for equity they aren't exactly start ups.

Private companies are obviously a different ball game. But this really gets back to the question of how to lower the cost of capital for smaller and midsize businesses, and I don't think restricting buybacks is the way to get there.

[crazy canuck]

If the owners want short term thinking and even put bonus systems in place to achieve it, then why deny them this pleasure?

If only the world of publicly traded companies worked that way.

[The Minsky Moment]

I'd have to look up our us wacc but I would bet it is under 6%. For a large multi national like apple or Microsoft, I'd be surprised if it is double digits. The debt side of the equation is going to be trivial and for equity they aren't exactly start ups.

Double digits according to this 2011 survey: https://core.ac.uk/download/pdf/6717216.pdf

Same according to this in 2017: https://www.cfo.com/budgeting/2017/09/getting-hurdle-rates/
Reports wacc around 10% but investment hurdles a bit higher at 12-13.5% (median/mean)

[Jacob]

If the owners want short term thinking and even put bonus systems in place to achieve it, then why deny them this pleasure?

If only the world of publicly traded companies worked that way.

Every decision made in the board rooms are shaped by the current regulatory and tax environment. Changing the regulations and tax legislation will shape the decisions to be different, but there's nothing about the current state of affairs that's particularly objective or neutral or anything.

So the answer to the Brain's question is "because it's in society's interest to deny them this pleasure." Just like it - apparently - has been in society's interest previously to encourage them to indulge in that pleasure (that, or because society has messed up the way they've implemented various regulatory schemes).

[Admiral Yi]

Correct, but in the case of stock buybacks only the selling shareholders get the benefit of the cash.  The loyal shareholders who remain get nothing.

They have the option to sell at the new, higher price. 

[alfred russel]

I'd have to look up our us wacc but I would bet it is under 6%. For a large multi national like apple or Microsoft, I'd be surprised if it is double digits. The debt side of the equation is going to be trivial and for equity they aren't exactly start ups.

Double digits according to this 2011 survey: https://core.ac.uk/download/pdf/6717216.pdf

Same according to this in 2017: https://www.cfo.com/budgeting/2017/09/getting-hurdle-rates/
Reports wacc around 10% but investment hurdles a bit higher at 12-13.5% (median/mean)

The 2017 figure doesn't indicate large multinationals...it could include private companies as well. Also we've significantly revised down our WACC estimate in recent years...I wouldn't be surprised if others have as well.

Looking up Apple, their effective interest rate on debt appears to be below 3%: they had $2.8 billion of interest cost on $106 billion of debt. The beta of apple is 1.25, so if you use an estimated market return of 8% for an S&P 500 company, they are probably around 10% on equity. I really doubt they are over 10% for WACC as the debt will drag the weighted average down.

For Microsoft, their beta is 0.81 so I'd expect their WACC to be lower (I didn't look up their effective interest rate but assume it is roughly in line with Apple).

[The Minsky Moment]

Correct, but in the case of stock buybacks only the selling shareholders get the benefit of the cash.  The loyal shareholders who remain get nothing.

They have the option to sell at the new, higher price. 

That assumes that the price goes up on a buyback, covered above.

[The Minsky Moment]

Looking up Apple, their effective interest rate on debt appears to be below 3%: they had $2.8 billion of interest cost on $106 billion of debt. The beta of apple is 1.25, so if you use an estimated market return of 8% for an S&P 500 company, they are probably around 10% on equity. I really doubt they are over 10% for WACC as the debt will drag the weighted average down.

For Microsoft, their beta is 0.81 so I'd expect their WACC to be lower (I didn't look up their effective interest rate but assume it is roughly in line with Apple).

The fact is we don't know what hurdle rate Apple or Microsoft are using in evaluating investment projects.  What we do know is that they elected to spend well over $100 billion in a year to buy their own shares.  I have a hard time believing that those two companies lack the ability to find investment projects that could return 5-8%.  And if THEY can't, the future of the American economy is more bleak than I thought.

[Barrister]

Looking up Apple, their effective interest rate on debt appears to be below 3%: they had $2.8 billion of interest cost on $106 billion of debt. The beta of apple is 1.25, so if you use an estimated market return of 8% for an S&P 500 company, they are probably around 10% on equity. I really doubt they are over 10% for WACC as the debt will drag the weighted average down.

For Microsoft, their beta is 0.81 so I'd expect their WACC to be lower (I didn't look up their effective interest rate but assume it is roughly in line with Apple).

The fact is we don't know what hurdle rate Apple or Microsoft are using in evaluating investment projects.  What we do know is that they elected to spend well over $100 billion in a year to buy their own shares.  I have a hard time believing that those two companies lack the ability to find investment projects that could return 5-8%.  And if THEY can't, the future of the American economy is more bleak than I thought.

I think that's actually a problem for Apple.  They have more money than they know what to do with.  They like having a fairly narrow focus on a few specific products or categories, and they like having enormous profit margins from those areas.  I'm sure they could find plenty of investment projects that would return 5-8% - but that would actually dilute their overall profitability.

[The Minsky Moment]

I agree BB and that's a problem. Because the talent and resources that Apple has built up as an organization could bring significant economic benefits if deployed more aggressively and bring more gross profits to Apple, even if it might depress their percentage ROI.  That's why even though I find Elon Musk pretty deplorable as a human being, I admire the business drive - that's a guy who knows how to put money to work. 

[alfred russel]

The fact is we don't know what hurdle rate Apple or Microsoft are using in evaluating investment projects.  What we do know is that they elected to spend well over $100 billion in a year to buy their own shares.  I have a hard time believing that those two companies lack the ability to find investment projects that could return 5-8%.  And if THEY can't, the future of the American economy is more bleak than I thought.

We don't, though I suspect the hurdle rate for Apple is higher than 5-8%.  However, their financials are publicly available:

https://www.sec.gov/ix?doc=/Archives/edgar/data/320193/000032019320000096/aapl-20200926.htm

Last year they had about $7.3 billion in capital expenditures, $1.5 billion in acquisitions, and $18.8 billion in R&D expenses.

They had $72.3 billion in stock repurchases (in line with the previous several years), and are sitting on almost $200 billion in cash and marketable securities.

Apple is obviously having enormous success, but I'm not sure they could deploy an extra ~$70 billion every year and do so effectively. If you exclude the cash and marketable securities it is sitting on, the assets of the company are only ~$180 billion. You are talking about radically increasing the size of the company in a very short time, which not only seems likely to lead to ineffectiveness in the new ventures but also distract from the highly profitable current ones.

[alfred russel]

I agree BB and that's a problem. Because the talent and resources that Apple has built up as an organization could bring significant economic benefits if deployed more aggressively and bring more gross profits to Apple, even if it might depress their percentage ROI.  That's why even though I find Elon Musk pretty deplorable as a human being, I admire the business drive - that's a guy who knows how to put money to work.

I'm sure that there are spreadsheets in Apple headquarters showing that the decision making path being followed by Apple is maximizing total shareholder returns.

[Admiral Yi]

That assumes that the price goes up on a buyback, covered above.

A pretty safe assumption in my experience.  Are you aware of any stock buybacks that have not raised the share price?

Your statement that the increase in EPS is a wash with the cash pile is pretty cavalier.  Correct me if I'm wrong, but isn't book value the lowest valuation metric?

[Barrister]

The fact is we don't know what hurdle rate Apple or Microsoft are using in evaluating investment projects.  What we do know is that they elected to spend well over $100 billion in a year to buy their own shares.  I have a hard time believing that those two companies lack the ability to find investment projects that could return 5-8%.  And if THEY can't, the future of the American economy is more bleak than I thought.

We don't, though I suspect the hurdle rate for Apple is higher than 5-8%.  However, their financials are publicly available:

https://www.sec.gov/ix?doc=/Archives/edgar/data/320193/000032019320000096/aapl-20200926.htm

Last year they had about $7.3 billion in capital expenditures, $1.5 billion in acquisitions, and $18.8 billion in R&D expenses.

They had $72.3 billion in stock repurchases (in line with the previous several years), and are sitting on almost $200 billion in cash and marketable securities.

Apple is obviously having enormous success, but I'm not sure they could deploy an extra ~$70 billion every year and do so effectively. If you exclude the cash and marketable securities it is sitting on, the assets of the company are only ~$180 billion. You are talking about radically increasing the size of the company in a very short time, which not only seems likely to lead to ineffectiveness in the new ventures but also distract from the highly profitable current ones.

Those are kind of crazy amounts of money.

News reports Apple wants to enter the car business, but is having trouble finding someone to manufacture their car for them.

They could basically take that stock buyback money for one year and go out and buy GM (total market value $74 billion, though obviously you'd pay more on a takeover).  Ford would be even cheaper, but I think the Ford Family still has control over the company.