As The Tide Goes Out, Effects Of Buybacks Are Exposed

The ConocoPhillips Poster Child 

“The words of men may temporarily suspend but they do not alter the laws of financial dynamics. The fundamentals always take precedence eventually”- 720 Global 11/30/2015

The quote above was from “Washington’s Warning” an article that scrutinized stock buybacks and the unforeseen impacts they may have. In that piece as well as an earlier missive, “Corporate Buybacks; Connecting Dots to the F-word”, we rebuked the short-termism stock buyback fad. Both articles made the case that corporate executives, through buybacks, promote higher short-term stock prices that serve largely only to benefit their own compensation. The costs of these actions are felt later as the future growth for the respective companies, employees and entire economy are robbed.

This case study details how the “the laws of financial dynamics” have caught up with ConocoPhillips (COP) and demonstrates how shareholders are suffering while executives prosper.

COP

On February 4^th, 2016 COP, in reaction to their fourth quarter earnings release, slashed its quarterly dividend from $0.74 to $0.25 per share, a level not seen since March 2005. COP also lowered its current year capital expenditure (capex) budget by $1.31 billion, marking the second reduction in as many months. The actions are a direct response to the plummeting price of oil and the damage it is having on COP’s bottom line. The company’s net loss for the fourth quarter 2015 was $3.50 billion or $0.90 per share.

While the losses and expense cuts are not shocking given the severe decline in oil prices, the dividend cut was a jolt to many investors. COP has consistently paid a dividend, as shown below, since 1990. During that 25 year period the dividend was increased 19 times but COP had never decreased it, until now. Even during the financial crisis of 2008/09, COP raised its dividend despite the price of crude oil dropping $100 per barrel.