Friday, September 26, 2008

AIG Highway to Hell

AIG (AIG) has some well publicized problems. Will we learn from history or are we doomed to repeat it? I did a little bit of a rear view mirror exercise and just reread some of AIG’s press release and conference call comments. The overall conclusion is that senior management kept posturing that the problems are a result of external circumstances such as the collapsing real estate market and sub-prime slime issues.

Management is quite correct in pointing to the external issues. But AIG is an insurance company which supposedly looks at external risk issues, comes to an actuarial opinion and then if possible prices the risk. I believe some actuaries will tell you some risks are not worth underwriting. Just as the rating agencies found a way to do it, AIG also found a way to do it. All of which has caused tremendous financial pain.

One has to wonder if AIG’s board and senior executives were of a mind set to “Handle the Truth”

In chronological order and using quotes from press releases and conference calls.

Feb 28:
American International Group, Inc. (AIG) today reported that its net income for full year 2007 was $6.20 billion or $2.39 per diluted share, compared to $14.05 billion or $5.36 per diluted share for full year 2006. The year over year looks great as this is improving. But wait you need to read the rest of it. The net loss for the fourth quarter of 2007 was $5.29 billion or $2.08 per diluted share, compared to net income of $3.44 billion or $1.31 per diluted share for the fourth quarter of 2006. The adjusted net loss for the fourth quarter of 2007 was $3.20 billion or $1.25 per diluted share, compared to adjusted net income of $3.85 billion or $1.47 per diluted share for the fourth quarter of 2006. Starts to suck doesn’t it.

March 12:
“The Board of Directors of American International Group, Inc. (AIG) today declared a quarterly cash dividend on the company's common stock of 20 cents per share, payable on June 20, 2008 to shareholders of record on June 6, 2008.” The dividend hang time is huge. On March 12 they release information which they hope to price into the stock immediately. But the dividend will be of record almost three months into the future. This comes after year end results were released some two weeks prior which contained bad news.

May 8:
“(AIG) today reported that the continuation of the weak U.S. housing market, the disruption in the credit markets, as well as equity market volatility, had a substantial adverse effect on its results for the first quarter ended March 31, 2008. AIG emphasized that despite the difficult environment and its resulting effect on AIG's overall financial performance for the first quarter, core insurance businesses continue to perform satisfactorily. AIG is confident that, although present economic conditions are difficult, AIG's unmatched competitive advantages, strong brand, and unmatched global franchise position it extremely well for the future.” But they signal to the marketplace that they can increase their dividend rate. The signal indicates financial health not problems. This is done 30 days before the previous dividend has even become of record.

May 8:
“The Board of Directors of American International Group, Inc. (AIG) today declared a quarterly cash dividend on the company's common stock of 22 cents per share. The dividend is payable on September 19, 2008 to shareholders of record on September 5, 2008. This represents a 10 percent increase in the quarterly cash dividend and the twenty-third consecutive year that AIG has increased its dividend.” Within 5 months they are climbing into a government sponsored lifeboat.

May 9:
Martin Sullivan - President, Chief Executive Officer said on the conference call “Excluding these external market issues, the underlying fundamentals of our core businesses remain solid, and several units performed quite well in the quarter.”Not our fault is the attitude. But check out the exchange between Martin Sullivan - President, Chief Executive Officer Jonathan Adams - Oppenheimer Capital when Martin Sullivan told Jonathan Adams. “Well, all I can tell you Jonathan is that obviously, when the subject of the raise in dividend was discussed with the Board, we believe clearly that it reflects the long-term prospects, the positive long-term prospects of the organization and that's really what the decision was based on.

Aug 6:
In the earnings release commenting on second quarter 2008 results, AIG Chairman and Chief Executive Officer Robert B. Willumstad said, "Our second quarter results were adversely affected by the severe conditions in the housing and credit markets and a very difficult investment environment. These results do not reflect the earnings power and potential of AIG's businesses and it is clear that we have a lot of work to do to restore AIG's profitability to where it should be. Still talking the talk of a focused CEO. But focused on what?

Aug 7:
Robert B. Willumstad - Chairman and Chief Executive Officer on the conference call said “The second quarter results do not reflect the earnings power of AIG's businesses.” You have heard this refrain many times.

Sep 23:
AIG suspends dividends after grabbing a huge government lifeline.

Christopher Cox’s Future

The regulatory state of US Capital Markets stinks. In a few months a new team will take over. Usually being the former SEC chairman opens quite a few doors. Who will admit to putting this guy on their team after all these problems. Everyone will need to be squeaky clean. Cox’s Teflon coating has been seriously scratched. I will buy his book just to see “What were you thinking”

GE Disappoints Who?

GE (GE) announced a few prudent if not very late moves. It will conserve cash by not buying its shares at a deep discount. It will engineer smaller dividends from GE Capital which will help GE put more money into GE Capital. But the corporate dividend seems OK or so they say?

Basically the plumbing is backing up. Instead of shareholders being bought out with their own money the funds will now be used to shore up problems in GE Capital. At this stage of the game it should not be a surprise that GE Capital may have some problems. What we need to worry about is GE’s slow response.

GE is a conglomerate that prides itself on superior thinking. They are very good at making strategic bets and then riding the gravy train for long periods of time. The culture does not allow for the nimbleness that is needed of a financial institution.

Everyone is focusing on how GE Capital is suffering. Given the recession/economic slow down that is looming how will the other strategic bets do?

Wednesday, September 24, 2008


As an experiement I have set up an account on Twitter. We will see if this is economically worthwhile.

Yahoo Rolls Out APEX

Yahoo (YHOO) is rolling out its APEX system at the annual Advertising week conference which opened Sep 22. APEX stands for Advertiser Publisher Exchange. It allows advertisers to target demographics more accurately. So if you are looking for a 33 year old yummy mummy with one child, decent common law life partner with executed co-hab agreement, who actually does not like Hagen-Daz ice cream but trades stocks on the internet this is the system for you.

The problem with the advertising business is that they drink their own cool-aide too often. The ads will become so targeted that there will not be enough revenue to cover the infrastructure. Ad revenues will become sales commissions where you are paid on a per scalp basis.

It used to be that at least 50% of advertising was wasted we just were not sure which 50% it was. What the ad industry and marketing in general need to figure out is how to generate demand and awareness. The focus on hyper specific targeting is inadvertently leading Yahoo and Google (GOOG) to become digital vending machines.
The real value will be in getting people in front of the vending machine. When you start having a crowd control problem then you will have done your job.

AIG Board Suspends Dividend!

AIG (AIG) Board announced that they have suspended the dividend. No kidding. That’s prudent stewardship. The question becomes were the past dividends declared incorrectly. There are regulatory constraints about declaring dividends if insurance companies are insolvent. That AIG is suddenly insolvent will not wash. I would like to see the board investigated and see what these guy’s were thinking all along.

Tuesday, September 23, 2008

DuPont Succession Issues

DuPont (DD) announced that its board of directors has elected Ellen J. Kullman, 52, president and a director of the company effective Oct. 1 and chief executive officer effective Jan. 1, 2009. Charles O. Holliday, Jr., 60, chairman and CEO, will serve as chairman of DuPont and as a member of the board until Kullman's expected succession as chairman.

The press release went on to highlight Ellen Kullman’s recent accomplishments with DuPont. They are clearly impressive. Here is the problem. It’s not with the people it’s with the process.

“Kullman’s expected succession as chairman” The implied comment is that this will eventually happen and is all in the works. What about governance, shareholder meetings and votes? Where is the shareholders voice? Why does such a large company feel the need for one individual to hold the three positions of Chairman, President and CEO?

Modern governance for quite some time has suggested enlightened companies separate the two positions. DuPont shareholders should be insisting on leading edge best practices. Not one person in charge of everything.

Monday, September 22, 2008

Nike Share Repurchase - Where is the Cash

Nike (NKE) announced a $5 billion dollar share repurchase program spread out over the next few years. This highly significant financial news comes out two days before their announced release of quarterly earnings. The Olympics have come and gone so this should be a report card on how well promotional activities have done or not done.

The dividend yield is approximately 1.40%. This number needs to be read in the context that the stock trades at the mid point of its 52 week range. The company clearly feels a need to buy its way out of its stock. They seem to be less impressed with the need to create a value proposition for shareholders.

Too much financial engineering at the moment. Fundamentals on Wednesday will tell the story. Watch for management to oversell the story. When you run your eye over cash flow and cash reserves you have to wonder where the cash is going to come from. A quick look at the numbers shows they are spending twice as much money on share buy backs as opposed to dividends. Last fiscal year’s net profits were approximately $1.8billion. It looks like every dollar earned is returned to shareholders in some fashion. Not a good prospect for the future.